Complaint Review: Supercuts Inc

Misrepresentation of Construction total investment Misrepresentation of financial performance False or misleading statement or omission in prospectus or amendment. Franchise Agreement expressly contemplates that the initial funds will be returned if the franchisee does not completes the training program. Failure to resell franchise licenses Since the signed the Development Agreement and Franchise Agreement, Supercuts, Inc. has (1) significantly increased the initial investment cost estimate in its FDD, and (2) provided relevant cost and unit level performance information that contrasts significantly from that disclosed in Item 19 of the FDD. Moreover, we have learned from another franchisee just how dire their experience was in trying to launch a Supercuts outlet in this state which indicates that even the information that Supercuts provided after the signing of the agreements understated the difficulties that a franchisee is likely to encounter in successfully opening a Supercuts business. These misrepresentations and material omissions in the franchise sales process are actionable under the Franchise Registration & Disclosure Law, Code Business Regulation Sect. 14-201et seq. Between when the franchisee executed the agreements and now, Supercuts, Inc. significantly changed Item 7 of its FDD, Estimated Initial Investment. In the 2014 FDD, which was provided to franchisee and in effect when they signed the agreements, leasehold improvements, Furniture Fixtures & Equipment ("FF&E"), and Signage expenses together ranged from $69,000 to $118,000. The FDD for 2015, which was provided to him this past November and is presumably representative of what the franchise would have to invest, states a range for the same items of $89,000 to $178,000 -an increase to the franchisee expected investment of 29% to 51% . The total projected investment for each FDD similarly increased from $113,900-$233,800 to $144,400-$293,800, or about a 26% overall increase. Moreover, with regard to a proposed location at a Pre-Construction Estimate provided by Project Manager disclosed a total of $129,000 for those same "hard costs" - about 10% higher than the highest estimate in the effective FDD. (This document is enclosed.) Given the vagaries of construction, it is quite possible that the actual expense would have been substantially higher. So the franchisee now realizes that he would necessarily incur significantly more costs than projected by the 2014 FDD with which he was provided, which would force him into debt. This developments call into question whether the 2014 FDD, as submitted to the Attorney General, violated Section 14-230 of the Franchise Act (false or misleading statement or omission in prospectus or amendment). Section 14-230 (as well as Section 14-227, the private civil remedy) is also implicated by the Item 19 financial performance representation in the FDD. Supercuts' Item 19 only discloses information on stores open for at least two full years, i.e., after they have survived a growth period and developed a book of business. This is misleading "cherry-picking" of store data that is misleading to prospective franchisees, because outlets which struggled and closed prior to reaching two full complete years of operation are necessary excluded. Prospective franchisees need to know about the risks that they may end up in that category, since 18 stores "ceased operation - other reasons" during 2014, and 21 stores "ceased operation - other reasons" during 2015. Based on my nearly two decades of representing franchisors and franchisees, those closures are usually outlets that failed financially in their first 24 months (if not sooner). The distinction between mature stores and new stores is demonstrated by Supercuts' "New Store Ramp-Up" document provided to the franchisee after he signed the agreements, which shows median gross sales during the first year of about $180,000. (This document is enclosed.) Moreover, neither this document nor Item 19 of the FDD discloses how many of the stores in states with few Supercuts locations achieved the sales figure. Until 2014 there was only one (1) Supercuts location in all of Maryland, and as of November 2015 there were only three (3) locations - meaning that the brand has little presence here and it will be harder to achieve the disclosed sales levels. After signing the agreements, the franchisee learned from a former owner of store that her store grossed just $55,592 in its first twelve (12) months of operation (June 2014 through May 2015) and suffered an operating loss of $112,487 - facts that Supercuts' agents in the region must have been aware of when selling the franchise licenses. (The store's financial performance information is enclosed.) Such information is material and relevant to a decision to operate a franchise in this state and, as the Attorney General would likely agree, the franchisee should have been able to consider it before executing the Franchise Agreement. Also, In fact, Sections 4.02 and 4.03 of the Franchise Agreement expressly contemplate that the funds may be returned until the franchisee completes the training program. Which has not occurred.