“Buyer Beware” - Have you heard that old adage? Well, it’s never been truer.
Steve Tucker CFC
Certified Franchise Consultant, Advisor & Coach; Serving People Interested In Being In Business For Themselves; Corporate Refugees, Resignees, Military, E2 Visa Entrants and Aspiring Entrepreneurs.
A fundamental difference between a business “broker” and a Certified Franchise Consultant is that brokers “sell” businesses; a competent CFC represents clients in a capacity similar to that of a fiduciary, working strictly for the client’s benefit – no one else. ?
My sole responsibility as a CFC is to assist my client in identifying the right fit for them, their families, their life goals and greatest desires while giving them the greatest probability of success.? I’m not selling anything.? I’m protecting and serving my client.
And clients don’t pay us – the franchisors fund us, so it might seem odd to hear this from me, but the fact is that all franchisors are not the same, and that goes beyond just being “compliant” with the laws that govern franchising.
Approximately 4,000 franchise organizations are licensed to operate in the U.S.? As with any large group of companies, there are always some “bad actors”.?
On July 12th, 2024, the Federal Trade Commission took a suite of actions to address growing concern about unfair and deceptive practices by franchisors - to ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners.
You might ask why, if I’m funded by Franchisors, would I put this out there?? Because like everything I do, doing the right thing always comes first.? Doing the right thing means we don’t do business with these bad actors. ?
With our IFPG affiliation, I represent ~ 650 of the best franchisors in the country; a large stable of thoroughbred organizations that have demonstrated their reliability, ethical conduct and genuine interest in seeing their franchisees flourish, on the premise that growing together is “the right thing” for everyone involved.
We encourage our clients to use these updated FTC rules and regulations within their questions with franchisors that they have prospective interest in, to ensure that they have all the knowledge they need to make their best decisions about what franchisor, business model and culture is the best fit for them.?
Let’s look at the Top 5 Concerns from Franchisees in this FTC project:
FTC Takes Action to Ensure Franchisees’ Complaints are Heard and to Protect Against Illegal Fees
New policy statement and guidance warn that franchisor contract provisions that cut off communications with government and undisclosed junk fees are unlawful
The actions announced by the FTC include a?policy statement?that warns that franchisors’ use of contract provisions,?including non-disparagement clauses?that prohibit?franchisees’ communications with the government, violate the law.
The statement emphasizes that franchisee reports and voluntary interviews are a critical part of FTC investigations and franchisees’ reluctance or inability to file reports and discuss their experiences may hamper the agency’s work to protect franchisees. Threats of retaliation against a franchisee for reporting potential law violations to the government are unlawful.
FTC staff also?released new guidance?explaining that franchisors cannot lawfully impose and collect fees from franchisees that were not previously disclosed. In response to the FTC’s request for information, franchisees reported ever increasing payment processing and technology fees that make it difficult to make a living, while others identified undisclosed fees for training, marketing, property improvement, or any other product or service required by the franchisor. ??This updated FTC guidance makes clear that it is illegal for franchisors to impose undisclosed “junk fees” - fees that raise costs and which may make the difference between a profitable franchise and an unsustainable one.
“Franchising is a chance for Americans to build a business, but the FTC has heard concerns about how unfair franchisor practices, like a failure to fully disclose fees upfront, go unreported thanks to a fear of retaliation," said FTC Chair Lina M. Khan.?"Today the Commission is making it clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal."
FTC staff also released an?Issue Spotlight summarizing the top concerns raised by franchisees?in response to a 2023 Request for Information. The FTC received more than 2,000 comments in response to the RFI, including from franchisees, franchisors and other stakeholders. ?The Issue Spotlight also describes staff analysis of Small Business Administration loan default data, finding that certain franchisors appear to present riskier investments than others.
Here are the top 5 concerns for Franchisees associated with these updated FTC guidelines and rules:
#1 Franchisee Concern: Unilateral changes to Franchise Operating Manuals:
The top concern raised by franchisees was frustration over franchisors unilaterally changing the terms of operating manuals that set requirements for franchisees.
For one franchisee, the result was “a massive overhaul, which . . . effectively turned the operations manual into a de facto franchise agreement.” ?One franchisee decried “a recent ops manual change [that]. . . added a $100,000 liquidated damages provision” that had not been disclosed in the Franchise Disclosure Document (“FDD”)
FTC-2023-0026-0003, Comment from Anonymous Franchisee: “One example was that the franchisor changed the service provider for an add-on service, which doubled my cost for that add-on service. Another change was to add a new service, which is included in around 40% of my jobs, leading to a higher cost per job for me.”
FTC-2023-0026-0251, Comment from [a Texas-based childhood education franchisee], “For example, we are now required to purchase a curriculum package priced at twice the open market value and a recurring monthly subscription of $700/month.” ???The franchisee didn’t “believe that could be legal, but [said] the threat is sufficient to scare us.”
#2 Franchisee Concern: ?Franchisor misrepresentations and deception: ??Several franchisees discussed misrepresentations franchisors made during the sales process.26 Start-up costs and sales, revenue, and profit data were some of the critical areas where commenters reported receiving information they believed was false or misleading. One commenter described “sales data that does not add up,” and a “completely false” estimated profit margin.
Commenters also reported franchisors had deceived franchisees about the extent of marketing assistance and training the franchisor would provide. ?And in many instances, franchisee comments addressed multiple, and overlapping, types of deception.
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For example, one Solar Grids franchisee described being told there would be earnings beyond those disclosed in the FDD and that representations about other aspects of the businesses—such as how much control the franchisee would have over solar installs—did not turn out to be true.
These concerns can implicate both state and federal laws prohibiting unfair or deceptive acts or practices.? The Franchise Rule requires financial performance representations to “have a reasonable basis and written substantiation.”? (You can find the FTC’s Franchise Rule here: https://www.ftc.gov/legal-library/browse/rules/franchise-rule)
#3 Franchisee Concern: ?Fees and royalties: ??Many franchisees commented on high fees and royalties imposed by franchisors, particularly credit card processing fees and technology fees. Reported fees for one commenter “went from an additional 3%, 5%, 7%, 10% to now . . . 14%” making it “impossible to earn a good living anymore.”?
Commenters also noted that mandatory royalties also lock them into failing businesses, even after the franchisee ceases operations.
How franchisors collected fees was also an issue, as one franchisee discussed their franchisor “[not] even allowing us to pay for [a] convention out of our own pockets in the manner we decide, but pulling $25 a week out of our sales money for the next five months.”
Different commenters described “surprise fees” not properly disclosed, with one referring to them as “junk fees.”
Franchisees discussed new fees not being tied to new services: “They just came out with a $75 tech fee. [They] Didn’t ask or tell anyone about it. . . We don’t get anything new from this.
#4 Franchisee Concern: ?Franchise supply restrictions and vendor kickbacks: ?Many franchisees expressed frustration with being forced to buy from a short list of franchisor approved suppliers.
Several commenters expressed that these required vendors charged prices exceeding those in the open market, and/or involved products that were not core to brand consistency. As one franchisee explained, “just simply looking online or going to Walmart, Tom Thumb, Kroger, etc … will show these exact same items from the exact same suppliers at a lower price [and that] local stores are 15 to 30% cheaper.”
One commenter observed that this concern is exacerbated when the franchisor receives kickbacks from their franchisees buying from preferred suppliers that are not passed on to the franchisee.
The Franchise Rule requires disclosure of goods and services franchisees are obligated to purchase from certain suppliers, including the franchisor’s financial interest in and payments from mandated suppliers.
#5 Franchisee Concern: ??Actual and feared retaliation:? About one quarter of franchisee comments were anonymous, with about a quarter of those commenters specifically citing retaliation fears as the reason for their anonymity.
Many began with some version of this emblematic disclaimer: “I am writing this anonymously, because I am afraid of retaliation.” ?Commenters described, among other scenarios, retaliation for franchisees’ active participation in an independent franchisee association or reporting unscrupulous franchisors to law enforcement.?
Blocked expansion, early/unjust terminations, and surprise inspection failures were tools franchisors reportedly used to threaten franchisees.?? One trade group summed up some franchisors’ message to their franchisees: “If you fight any battle, you will lose the war.”
Commenters discussed how non-disparagement clauses can exacerbate retaliation fears. These clauses “effectively silent franchisees, preventing them from speaking out against franchisor misconduct and concealing the true extent of unfair practices.”
Whether these provisions are strictly enforced can be immaterial. “The mere threat of losing one’s business just for telling the truth is a huge disincentive to speaking. No franchisee, with their entire life savings and net worth on the line is going to take a chance.”
Some state laws also address levers that franchisors reportedly use for retaliation: premature terminations and transfer restrictions. ?For example, Minnesota bans termination or failure to renew a franchise “except for good cause.” ??Tennessee prohibits premature termination “except for good cause asserted in good faith.”? ?New Jersey is similar.?? Minnesota law also makes it “unfair and inequitable for a person to unreasonably withhold consent” for a qualified franchise transfer. ?Tennessee specifies franchisor transfer qualifications must be “nondiscriminatory, material, and consistently applied and reasonable.”? California makes it “unlawful for a franchisor to prevent a franchisee from selling or transferring a franchise . . . to another person provided that the person is qualified under the franchisor’s then-existing standards.
All of these franchise resources can be found at the?newly launched FTC franchise website: https://www.ftc.gov/news-events/features/franchise-guidance
Prospective and current franchisees and franchisors can use the website as a single resource for the FTC’s latest franchising materials.
Now if you’ve read all of this, (and that’s a lot), you’re probably saying to yourself, “Good Grief! Is it really this complicated?”? You’re right – navigating franchise waters is complicated. ?The road is littered with poor decisions and false or incorrect expectations.?
THAT is why anyone considering a franchise business opportunity NEEDS someone like us - it costs you NOTHING to get the benefit of our broad scope of knowledge and resources working solely in your interest.
Questions?? Interested in being in business for yourself but not by yourself?? You can reach me directly at: [email protected]