The U.S. Federal Trade Commission issued a pair of statements on franchising, along with a list of concerns about the business model. It also reopened the comment period through fall.
Each of the moves on their own are not huge. The agency banned undisclosed fees and removed some teeth from non-disparagement clauses. But taken together, the FTC’s set of moves represented some of the strongest language on the franchise industry in the agency’s history.
Maybe more importantly, it set the stage for a new, more deliberative approach toward franchise regulation by the federal agency responsible for monitoring its practices.
And it may all be moot in a few months.
First, let’s understand the context. Franchising as a business is great. Restaurant chains that franchise can more easily finance their growth, which is important given the limitations of other forms of financing. That financing is harder to come by right now, given the higher cost of debt and the reduced availability of private-equity and venture funding.
With a good idea and smart business practices—key points here—a franchise brand can quickly establish a market presence and build long-term success.
In the process, it provides a path to ownership to people that might not otherwise get that opportunity. The bulk of franchisees in the Domino’s system, to take one example, started as drivers. Few other industries can say that. Franchising has created an awful lot of millionaires.
But like anything, franchising can be misused. When it is, the franchisees that buy into those systems can face a financial disaster, especially if they used federal-backed loans to open their franchise.
The FTC’s franchise disclosure rules are aimed at ensuring franchisees can make the proper decisions, but they are not backed by any real teeth.
As such, unlike federal securities rules that can jail someone for, say, making stock trades based on insider information, franchisors can walk all over franchise rules with little concern that they will get in much trouble.
The FTC’s moves hardly change that. But the agency’s statements on “junk fees,” using terminology the Biden Administration has given to undisclosed fees in consumer settings, will limit franchises’ ability to charge for new technologies or other expenses.
The reopened comment period also suggests the agency could take more regulatory action. The agency deliberately told franchises that they couldn’t use any non-disparagement clauses to punish franchisees that complain to the government. And then it asked for more comments.
The dozen concerns the agency listed could provide a preview for some of the areas it may look at in the future. That includes misrepresentations during the sale process, a particularly troublesome issue when franchisees buy into a brand based on false promises of profits or underestimated buildout costs.
The FTC’s comments could also pave the way for an effort to give franchisees the ability to sue their franchisor over these issues, which could have a major influence on franchises all over the country.
Still, the agency’s processes are slow. And the comments themselves were passed on 3-2 votes, meaning that much of this could change in a few months if Donald Trump wins the presidency.
Yet it seems that the FTC has its eye on franchising, after years of mostly ignoring the industry.
This story first appeared inRestaurant Business.