Things Are (Still) Rotten in the State of Franchising

In my position as the president of the American Franchisee Association, a national trade association that advocates for the rights of franchise business owners, I have seen many tragic stories from those who've invested their life savings in franchise businesses. It is horrifying to watch someone lose their life savings, their home, even their marriage, and file for bankruptcy, not due to any fault of their own, but because of their franchisor's bad faith business practices.

Yes, there is a patchwork quilt of franchise law out there. However, it has proven totally inadequate in dealing with the systemic problems in franchising. Let's start with the Federal Trade Commission's (FTC) "Franchise Rule," as those in the industry call it. The "Franchise Rule" is supposed to prevent fraud and misrepresentation in the pre-sale process (that means, before you buy the franchise). The Rule was promulgated in 1979 ... based on abuses by franchisors during the 1960's. Problem is, the FTC's Franchise Rule continues to address the dysfunctions of franchising during the 1960's when franchising was in its infancy. Even then, certain franchisers and their lobbyists (read, "lawyers") worked for ten years to hobble promulgation of the Rule. When it was evident that the "Rule" was going in effect, the "gimmee" to the franchisor community was that wronged persons would have to petition the FTC to address the wrongs. There was no "private right of action" given to the wronged franchisee. A franchisee has to go to the FTC to ask for redress on their behalf.

That might have been all right in the 1960's when the scam was in the pre-sale. The scam in franchising today is in the contract. Franchise contracts today are written to totally circumvent the spirit and intent of the Rule. They are written to deprive small business franchisees of many common law rights that every other citizen of the United States of America has access to; they are written by the corporation's franchise attorney in such a way that they can be changed arbitrarily by the corporation post-sale -- after the franchisee has sunk his/her money into the franchise.

That's just one of the issues franchisees hit up against during the ten or twenty year term of their franchise contracts. Another problem that we still wrestle with today coming from the 1960's was those folks selling franchises and promising investors they would make specific large amounts of money if only they bought a particular franchise. The FTC's requirements regarding "earnings claims" (Item 19 in the offering circular) were born out of that era. To this day, the FTC allows corporate franchisors to volunteer historical financial information about their operating outlets...you heard right..."volunteer." Does it surprise you that 85% of franchise corporations "volunteer" to keep the financial viability of their franchised outlets secret? Even today, 27 years after its promulgation, the FTC sees no need to require franchise corporations ... the ones who lure buyers in with "own your own business, be your own boss" advertisements ... to disclose upfront the financial viability of their business offerings. To me, this is like buying a car without an engine. One of the most important facts you want to know when you go into business for yourself is, "how much money am I going to make?" If the idea of providing pre-sale information is important, then it is a fatal flaw of the FTC's franchise rule that disclosure of some measure of financial performance is not required.

You're starting to get the picture ... twenty-seven years after its promulgation, franchise corporations still hide behind and misuse the Item 19 disclosure requirement of the Franchise Rule. As a prospective buyer you are often told by franchise salespeople that they are ‘prohibited by law’ from making any earnings representations. This is basically untrue .. yes, some might even call it a lie! There is no federal rule or state law that prohibits franchise corporations from providing accurate earnings information in the disclosure document ... they just prefer not to volunteer the information.

By the way, what is most ironic about the voluntary disclosure of historical financial earnings information is that of the franchise enforcement cases undertaken by the FTC during the most recent audits by the General Accounting Office (GAO), 99.9% of the cases cited had to do with fraudulent or misleading earnings information give to prospective franchise purchasers. Yet, surprisingly, the FTC does not think the American consumer is entitled to that information ... upfront.

It has been the American Franchisee Association's mandate to strengthen the scenario for current and prospective franchise owners. Towards that end, I am going to start writing a column on Blue MauMau that highlights the issues that affect franchise owners across America with a frank discussion of their needs, their rights, their lack of rights and what, if anything, is coming down the pike to level the playing field. Franchisees need the help more now than they ever did in the 1960's.

Susan P. Kezios
President
The American Franchisee Association

 _______________________________

53 W Jackson Blvd Suite 1157
Chicago, IL 60604
Ph:(312) 431-0545, Fax: (312) 431-1469
www.franchisee.org

©Copyright 2006, Susan Kezios.

Rotten apple photo by tp. FTC statue of man harnessing trade (horse) photo by Novak.