Franchises Are Highly Regulated?

I believe that is one of the gross exaggerations commonly heard in franchising. If you Google the phrase “Franchises are highly regulated” hundreds of websites pop up that include those words; franchise consultants, and attorney websites claim that franchising is a “highly regulated” field. How anyone can state that the franchise industry is highly regulated, is beyond me. The Federal Trade Commission (FTC) Franchise Rule requires little to no standards that a company must meet in order to offer franchises, there are only disclosure of information requirements. The FTC could learn a little from the Securities Exchange Commission (SEC).

Michael Seid of MSA Associates sums it up very well in his 8-28-06 post here on BlueMauMau when he stated:

“The legal requirements to become a franchisor in the United States are very low. All a company needs to have is a disclosure document and all a company needs to do is present those documents to a prospective franchisee at the appropriate time. No regulator ever reviews those documents in most of the United States. Even where they do, the role of the regulator is to ensure that the franchisor is in compliance with the law, not to ensure that the franchisor’s underlying business is franchisable or even viable.”

The FTC unlike the SEC which has strict securities laws where companies must pass net worth requirements and the stock offering is subject to stringent standards. There are no such requirements with the FTC Franchise Rule, just a requirement to disclose information in the Uniform Franchise Offering Circular (UFOC).

To illustrate the difference between “highly regulated” SEC and the low bar for the FTC, here is an example; let’s say I opened a business last month and opening sales were better than expected, I feel I’m ready to franchise. I have little to any experience in franchising and little business experience other than the month I’ve been open. And, let's say I decided to capitalize my new franchise corporation with $1.

I’d have no problem offering my franchise for sale in the 35 states that are covered by the FTC Franchise Rule. In the other 15 states that have laws governing franchises I would have to jump thru a few more hoops.

Of course, I would have done an audit of the opening balance sheet, reflecting cash of $1 and stock issued for $1. This simple audit is something a CPA would charge a couple hundred bucks to perform.

That’s it, prepare my UFOC and I’m ready to start selling franchises in 35 states.

Suppose I want to sell some stock in my franchise company.

Forgetaboutit - the SEC laws are too strict.

Explain to me how in a so called “highly regulated” business I can offer a franchise and have the individual mortgage their house to invest in my franchise opportunity, yet I can’t even sell a $1 of my stock to the same individual?

There is a perception that franchising is a relatively low-risk entry to entrepreneurship because the franchiser provides benefits such as name recognition, bulk buying rates and advertising. But, the reality is that no two franchises are alike and while some provide tremendous value to a franchisee others don’t. The franchises that do provide the value are worthy investments, the ones that don’t stay away from and hide!

The proposed Franchise Rule changes don’t do enough. The FTC should raise the bar and require certain minimum standards for a franchise to be able to start offering franchises for sale.