Brokers Under the New Rule

The View of a Litigator on the FTC's New Deletion of Broker Disclosure by Franchisors

Every time a disclosure rule change is made/ contemplated/ suggested, there is a hue and cry from franchisors that the disclosure process is already too cumbersome and another hue and cry from the franchisee community that many more specifics are needed to protect the public from deception and abuse. Having been on both sides of just about every franchise issue for lo these many years, I am becoming somewhat jaundiced concerning the fine tuning of “rules”.

Disclosure requirements are beneficial for investment worthy franchisors. They actually help sell franchises. Disclosure requirements hurt fewer “bad” franchisors than people think, because the miscreants don’t make effective disclosure of the factors that make them bad investments, no matter what the rules say.

I have been involved in many cases where outside sales facilities were used by franchise companies prior to this new rule that disclosure about brokers is no longer critical. Those experiences have made me very cynical.

In my experience, many people who work for brokers, consultants and franchise marketing firms are people who were previously involved with franchise companies that either didn’t make it or that made it for a short time and then pooped out. Poop out can occur for many reasons. Some are management failures and some are market force driven. Some of the brokerage personnel have events in their past that were required to be disclosed. That disclosure would have cost them their jobs. So they didn’t inform their new company about the events, and the events simply weren’t disclosed.

Rarely did it come back to bite anyone. When it did, the offender was fired and just moved on to another brokerage firm to repeat the nondisclosure. The offender almost never had collectability, and was just some poor schnook whose only possible value was as a turncoat witness, given an exit from defendant status for ratting out the company.

In what some call “the final analysis” it is the franchisor who bears responsibility for what is said and for the quality of those with whom they do business and who represent the company. If the franchisor is not meticulous about that, rules about brokerage agent disclosures probably don’t make a significant contribution to franchise investment prospects.

For that reason, the deletion of franchise broker disclosure requirements from the FTC Franchise Rule doesn’t seem to me to matter a great deal. I just don’t care about it.

The other critical basis for my lack of interest in broker disclosures is that really competent deal due diligence now has a greater capability to overcome any disadvantage that could be perceived from the absence of broker disclosure. The quality of available deal and legal due diligence is now so high that anyone who does not now avail himself of it will soon be seen not to have been victimized by anyone other than himself. If you had used the resources that are out there, your injury probably would not have occurred.

This likely will soon be used as a defense to franchise fraud cases, and the more recent the franchise purchase that is accused, the more traction that defense will have.

So if you have used competent due diligence resources, you can just save the drama for your mama on minor issues like brokerage disclosures. Lack of brokerage disclosures won’t have been the cause of your injury.