Part 2 of 2 articles
In this article, we will explore the remaining six issues (7 to12) outlined in the FTC’s Spotlight report, which is based on the 2023 Request for Information (RFI) and will examine their implications for franchisees. We previously published the first part, which covered FTC Spotlight Issues 1 to 6. You can read it here.
Backstory: The FTC, led by Lina Khan, has taken a renewed interest in franchising practices, reaching out to franchisees through statements, podcasts, and last year’s Request for Information. On July 12, 2024, this engagement turned into action, when the FTC press release that included a policy statement, staff guidance, and a spotlight on franchisees’ top concerns.
Let’s delve deeper into each of the remaining six spotlight issues. We will analyze how they correspond with the Franchisee Bill of Rights.
Analysis of the Spotlight Issues, 7 to 12
- Franchise renewal problems.
In this section, the FTC discussed how many renewals differ greatly from the original business the franchisee bought into. How a change in leadership, including a private equity buyout, can cause the business model to be fundamentally changed. As one commenter stated, “I have 2 very bad choices: 1) Sign the agreement or 2) Refuse to sign the agreement and lose my business altogether.” It was also noted from another author of the “disproportionate bargaining power” the franchisor holds.
FRANCHISEE BILL OF RIGHTS: A reasonable right to renew the franchise.
- Franchisor refusal to negotiate contract terms.
For most franchisees, the franchise agreement is presented as “take it or leave it”. And while consistency is important, many franchisees don’t realize that they can negotiate their contract. From the AAFD perspective, the refusal to negotiate becomes much worse at time of renewal, when as stated above, the franchisee’s bargaining position is severely limited.
FRANCHISEE BILL OF RIGHTS: A reasonable right to renew the franchise.
- Franchise Disclosure Document issues.
The FTC commented that “many franchisees complained of incomplete or misleading FDDs.” The lack of standardization of financial reporting in Item 19. Low buildout estimates and deceiving profitability numbers were mentioned.
FRANCHISEE BILL OF RIGHTS: The right to full disclosure from the franchisor, including the right to earnings data available to the franchisor which is relevant to the franchisee’s decision to enter or remain in the franchise relationship.
- Private equity takeovers.
The FTC noted many commenters talking about how the business model and how the priorities have changed once private equity took over their franchise brand. Decreased levels of franchisor support and increased fees. A focus on maximizing revenue to increase royalties versus franchisee profitability. - Marketing fund transparency.
Franchisees made comments on the use and transparency of the marketing funds collected. Marketing funds being used to recruit new franchisees, not to market existing franchisees’ businesses, or disproportionally being used to benefit corporate-owned locations. The FTC stated that “Several franchisees used the term ‘slush fund’ to describe the marketing fund”. Comments about franchisors not providing promised marketing fund audits.
FRANCHISEE BILL OF RIGHTS: The right to the franchisor’s loyalty, good faith and fair dealing, and due care in the performance of the franchisor’s duties, and a fiduciary relationship where one has been promised or created by conduct.
- Liquidated damages clauses and early termination fees.
The FTC reported that “Several franchisees singled out liquidated damages clauses as trapping them in unprofitable franchise systems. Unfortunately, franchisors of failing brands still feel the need to wrongly hold franchisees accountable for their failures by enforcing liquidated damages.
FRANCHISEE BILL OF RIGHTS: The reciprocal right to terminate the franchise agreement for reasonable and just cause, and the right to not face termination, unless for cause.
Whether you have encountered any of these issues yourself or not, we encourage franchisees to be vigilant and proactive, especially in their research when considering the purchase of a franchise. While we support the business model, this industry has gone unchecked for too long. We advocate for fair franchising and urge our members and subscribers to stay engaged, informed, and educated.
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Keith is the AAFD preeminent voice for political action in support of franchisee rights at both the Federal and State level. Keith has been an active leader and voice for franchisee causes over the past twenty plus years, with a growing track record of bringing franchisee friendly legislation introduced and adopted throughout the USA. Keith is also a multi-unit Subway franchisee, and understands the challenges and opportunities that come with being in business for oneself. He is passionate about protecting the interests of franchisee business owners, and will work tirelessly to ensure that they are treated fairly under the law.
The AAFD is a national non-profit trade association representing the rights and interests of franchisees and independent dealers throughout the United States. The AAFD’s mission is to achieve Total Quality Franchising. We do this by promoting fair and equitable franchising and dealer practices and empowering effective independent franchise associations. We also provide members with programs, services and products which enhance their individual businesses and careers.
