Home | General | More Franchise Disclosure is a Good Thing, but Waiting another 30 years is Not.

More Franchise Disclosure is a Good Thing, but Waiting another 30 years is Not.

In its first major overhaul of its franchising regulations in nearly 30 years, the Federal Trade Commission is finally calling for greater disclosure by franchisors.

The FTC aims to insure that prospective franchisees “avoid harm” when considering a franchised business, the FTC said in publishing the revisions, which will become mandatory next year.

Under the revised franchise rule, confidentiality agreements preventing current or former franchisees from talking about their experiences would have to be disclosed. Regulators often recommend that would-be franchisees contact former or current franchisees to get their take on a business.

The FTC also wants franchisors to provide information about franchisee associations operating under a trademark, so prospective franchisees can learn more about the pros and cons of a system. Some examples of franchisee associations are: North American Association of Subway Franchisees NAASF, and Dunkin Donuts Independent Franchise Owners DDIFO.

Franchisors will now have to reveal lawsuits they brought against their franchisees under the revisions; the FTC’s original rule only required that franchisors disclose litigation filed by franchisees.

“The nature of the relations between the seller and the purchaser, as reflected in litigation, is of central importance” in assessing a major investment such as a franchise, the commission concluded. Other requirements include disclosure of exclusive territory.

Often franchisees think they won’t have to worry about another franchise opening up down the street, only to find that they’re not protected. “Taken together, each of these amended disclosures … will enable prospective franchisees to better assess the quality of the franchise relationship, and their likely success as franchisees,” the FTC said.

However, I am disappointed that the revised rule fails to require disclosure of a franchise’s financial performance. I think it’s very important to the future success of franchising that more franchisors make financial representations and I believe it would have been a good time to require franchisors to make financial representations. Hopefully we won’t have to wait another 30 years.

The revised FTC rule becomes mandatory in July 2008, but franchisers may comply beginning July 1.

Cross Posted at Lets Talk Franchising

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3 comments
Carol Cross
Carol Cross

Obviously, if franchisors were required, under law, to disclose earnings/past and present performance statistics, this would result in competition among those franchisors in the same or similar concept (sector) to capture the labor and capital of potential franchisees. Potential franchisees would then want to invest only in those franchisors who produced the most profits with the least risk and franchisors whose present and past performance statistics on a unit basis reflected high investment risk and no profits would soon find it difficult to recruit new franchisees to grow their networks. It must be that these "material" statistics are not required to be disclosed under law to buyers of franchises to permit franchisors to churn and turn and pump and dump individual units out of view of the public and out of view of government. It must be that government believes that the durability or growth of franchising as a business mondel would be threatened if the true risk of the investment, as reflected in the performance statistics, is required to be disclosed under law to new buyers of franchises. The AFA has said that it took ten years for the FTC to give birth to a "mouse." I agree! And, the trap or trick of the government disclosure and an adhesory contract wrapped in one package, with an ineffective warning, continues to provide a pool of potential franchisees for the franchisors.

Steve W
Steve W

Enhanced disclosure is a step in the right direction, with the overriding goal of enabling franchise buyers to make more informed decisions. I don't know any other major investment where the seller won't voluntarily disclose financial or operating results before you buy or invest; and it's market driven - noone would invest in it if they couldn't benchmark the results. Maybe the financial sophistication of the average franchisee is too low. Even hedge funds, as secretive as some of their investing strategies are, will disclose their returns.

Les Stewart
Les Stewart

Disclosure laws are a red herring. Knowing marginally more of how you could be screwed does little to support the efficient allocation of capital in our economies. It does, however, a great deal to distract from the abuse of dominant position that relationship regulation might help ameliorate. FTC Advice The only logical conclusion is to not buy into any industry that continues to misrepresent its fundamental business risks. Australian article An interesting paper was published just last fall that states: The research suggests that the standard form, long term nature of the contract and the nature of the primary relationship in the sector overall is inconsistent with the use of disclosure as the primary regulatory tool. Spencer, Elizabeth C., The Efficacy of Disclosure in the Regulation of the Franchise Sector in Australia, European Network on the Economics of the Firm (ENEF) GREDEC, CNRS and University of Nice Sophia Antipolis, 2006. http://www.enef.group.shef.ac.uk/2006%20workshop%20papers/SPENCER.pdf