By Bailee Kleinhandler, Sotos LLP

Earning projections are a highly debated and closely scrutinized aspect of franchise disclosure. Franchisors are not obligated to include financial performance data in their disclosure documents; however, if they choose to do so, they must comply with strict regulatory requirements designed to ensure transparency and accuracy.

In Ontario, if a franchisor decides to provide earning projections, they must include detailed information to back up their claims and projections. This includes a clear explanation of the basis for the projections, the assumptions used in creating them, as well as guidance on where prospective franchisees can access the supporting documents for review. Financial projections can take many forms, from historical earnings records to forward-looking estimates. Whether provided explicitly in writing or suggested indirectly all earning projections or related claims must meet the same rigorous standards of disclosure. These measures are designed to ensure that the information presented is reliable, relevant, and not misleading.

Including earning projections and financial information in franchise disclosure documents has been a longstanding practice. However, the recent “Paramount Trilogy”[1] has reaffirmed the importance of these principles. While these cases have broader implications and represent important developments in franchise law, this article will focus specifically on how they address earning projections and the associated obligations placed on franchisors.

Case Overview
Three franchisees of the Paramount Fine Foods (“Paramount”) franchise system – Versatile Holdings Inc (“Versatile”), Everest Group Inc (“Everest”), and Premium Host Inc (“Premium Host”) – were each seeking to rescind their franchise agreements under subsection 6(2) of the Arthur Wishart Act (Franchise Disclosure)[2] (the “Wishart Act”). All of the franchisees alleged that the franchisor had failed to provide them with proper disclosure in accordance with the Wishart Act.

In 2017, the franchisees delivered notices of rescission. The franchisor however, disputed the validity of these rescissions and argued that it was exempt from providing disclosure to the franchisees. In 2021, the three actions proceeded to trial and were heard together. The trial judge upheld the validity of one rescission but rejected the others. All parties appealed almost every aspect of the trial judge’s decision. The Ontario Court of Appeal heard the appeals in 2024.

The Ontario Superior Court of Justice found the rescission claim to be unsuccessful with respect to Versatile and Everest. The Court determined that these franchisees had failed to prove valid rescissions under the Wishart Act. However, with respect to Premium Host, the Court found that the franchisor did fail to provide the required financial information about the operations of the franchise location. This failure constituted “piecemeal disclosure”, violating subsection 5(3)[3] of the Wishart Act, constituting a fatal flaw.[4] The trial judge concluded that this deficiency rendered the disclosure invalid, as Paramount had not delivered a compliant disclosure document to Premium Host.

At issue, was certain financial information provided by the franchisor to the prospective franchisee.   Specifically, the franchisor provided the prospective franchisee with the weekly gross margin statements of the previous operator of the franchise, which showed the business’ remaining revenue after subtraction of direct costs. This information was deemed to be a “material fact” within the meaning of the Wishart Act. 

In the decision, the trial judge emphasized that disclosure must be delivered in a single, unified document. Delivering material financial information separately, such as through emails or other communications apart from the formal disclosure document, violates the Wishart Act’s requirements. For Premium Host, failure to include historical financial data about the Heartland location in the disclosure document was particularly significant.[5]

At the Court of Appeal, the judge dismissed all appeals, upholding the trial judge’s finding in full. The Court emphasized that historical financial data, particularly information critical to a franchisee’s decision-making process, must be included in the disclosure document. [6]

Why Should Franchisors Care?
The Superior Court of Justice and Court of Appeal decisions reaffirm critical principles under the Wishart Act. While these rulings did not introduce new legal standards with respect to including earning projections in disclosure documents, they underscored the critical importance of providing accurate and comprehensive disclosure.

Specifically, disclosure must be delivered in a unified, complete format. Providing material information separate from the formal disclosure document can render the entire disclosure invalid, even if the omission was unintentional. While not the primary focus of these decisions, the Courts have reinforced that financial performance information and earning projections are integral to disclosure. The term “projections” is read extremely generously. In the Paramount Trilogy, while the Court focused on the “one document at one time” rule, the financial information at issue was historical financial information about the operation of the particular unit. However, other cases have confirmed that disclosure of past financial performance of other franchisees qualifies as a “projection” (see Giroux et al v 1073355 Ont Ltd et al[7]). Despite the Court not explicitly addressing this point in the Paramount Trilogy, the historical financial information would almost certainly be considered a projection. As a result, franchisors must ensure that any projections, if a franchisor elects to include them, are accurate, substantiated, and delivered in compliance with the Wishart Act.

Prospective franchisees are often focused on understanding the potential profitability of a franchise, frequently asking how much they can expect to earn. However, when disputes arise between franchisees and franchisors, these projections, along with the disclosure provided on these projections, often come under scrutiny, with franchisees questioning why the anticipated earnings fell short.

Although financial projections can be a powerful sales tool to attract prospective franchisees, they carry inherent risks. An offhand comment by someone involved in the sales process, even if unauthorized, could be interpreted as an official earnings projection, potentially exposing the franchisor to legal liability. To avoid this, franchisors must establish clear guidelines for their teams and ensure that anyone involved in franchise sales understands the importance of sticking to authorized and verified information, or refraining entirely from discussing earning projections.

Final Remarks
For franchisors, the message is clear. When it comes to financial disclosure, there is no room for error. The Paramount Trilogy highlights the need for franchisors to review and strictly adhere to sound disclosure practices related to earning projections to ensure full compliance with Wishart Act and accordingly, reduce the risk of uncertainty associated with judicial interpretation.

Bailee Kleinhandler, Sotos LLP
Bailee Kleinhandler is a corporate associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. Her practice focuses on the franchising, licensing and distribution industry. Bailee can be reached directly at 416.572.7311 or bkleinhandler@sotos.ca.

[1] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 aff’d, Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577.

[2] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3, s 6(2).

[3] Ibid at s 5(3).

[4] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 343-352 and 375-379.

[5] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421.

[6] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 12.

[7] Giroux et al v 1073355 Ont Ltd et al, 2018 ONSC 143.