WASHINGTON — A new report suggests several moves U.S. Congress and other government agencies could make to improve the franchise-franchisee relationship.
U.S. Sen. Catherine Cortez Masto (D-Nev.) re-introduced legislation to protect entrepreneurs from bad actors in the franchise industry who use deceptive financial information to sell underperforming or unprofitable businesses, a press release says.
The SBA Franchise Loan Transparency Act would require that a prospective franchise owner receive accurate historical revenue and store closure information from the franchise corporation before the Small Business Administration (SBA) approves any loan to the franchise owner.
“Franchise owners in Nevada and around the country have told me about how franchise corporations painted rosy pictures of the money these businesses could make, and how they later found out that they’d sunk their life savings into unprofitable stores,” Cortez Masto said. “Taxpayers and small business owners fund the Small Business Administration loans that many franchise owners use to go into the franchise business, and taxpayers and small business owners are the ones who pick up the tab if franchise businesses fail. For the sake of both small business owners and the public, franchise corporations should have to give historically accurate financial performance information to anyone applying for these government-backed loans.”
In her new report, “Strategies to Improve the Franchise Model: Preventing Unfair and Deceptive Franchise Practices,” Cortez Masto noted numerous steps Congress, the Federal Trade Commission and the Small Business Administration could take to protect franchisees. The report also cites 10 franchise models, including convenience-store retailer 7-Eleven Inc., “with a history of owner complaints.”
7-Eleven franchise owners, the report said, “have reported pressure to sign unfair agreements that allow the company to exert pervasive control over its owners both financially and operationally.” Click here to view the complete report.
7-Eleven Inc. did not respond to a request for comment from CSP Daily News by press time.
- Irving, Texas-based 7-Eleven is No. 1 on CSP’s 2021 Top 40 update of the 2020 Top 202 ranking of U.S. c-store chains by store count.
The SBA Franchise Loan Transparency Act, cosponsored by Sens. Diane Feinstein (D-Calif.), Tammy Baldwin (D-Wis.), Chris Murphy (D-Conn.) and Elizabeth Warren (D-Mass.), would require any taxpayer-backed SBA loan to a franchise to provide:
- The average and median first-year revenue for all franchise locations for each of the preceding three years.
- The number of franchise locations that went out of business or were sold by the franchisee during the first year of operation for each of the preceding three years.
- The average and median revenues for all locations of the franchise for each of the preceding three years of operation.
These steps, Cortez Masto said, would ensure that prospective franchisees get the same information as the lender and are not misled by franchisors or consultants who provide them with false revenue numbers to push them into buying an unsuccessful franchise.