The International Franchise Association (IFA) is recommending that franchisors improve their pre-sale disclosure to prospective franchisees, as part of a series of “responsible franchising” policy recommendations ahead of potential regulatory moves.
The recommendations cover franchisors, franchisees and suppliers, and largely focus on improving the quality of disclosure while reminding prospective operators that they’re making a risky investment.
The recommendations feature no enforcement mechanism for that disclosure and the association is urging regulators to avoid any move that would “meddle in the franchise relationship.”
“These policy recommendations would modernize current disclosure requirements to enable all industry stakeholders, franchisors, franchisees and suppliers, to play a vital role in strengthening franchising as the model continues to expand as a pathway to small business ownership,” IFA CEO Matt Haller said in a statement.
“IFA encourages the Federal Trade Commission (FTC) and state regulators to adopt these improvements to pre-sale disclosure and refrain from attempts to meddle in the franchise relationship, freely entered into by both parties,” he added.
The recommendations come as the FTC considers updating its franchise rule, which requires franchises to make a complicated list of disclosures. Franchises must publish these disclosures annually and provide them for any prospective franchisee looking into the brand.
But the disclosures, known as the franchise disclosure document, are complicated and cumbersome. They are also rarely enforced, either at the state or federal level, and unless there are specific state regulations franchisees often have little recourse when they invest in a franchise based on false promises made during the sales process. The one recent FTC enforcement, involving Burgerim, resulted in a single, $1,000 payment from the company's founder and a ban on selling franchises.
The IFA’s recommendations would improve disclosure by making it easier to understand. The trade group would shift the document to a “conversational, question-and-answer style.”
It would also add an executive summary enabling operators to more easily compare franchise opportunities.
The IFA would also modernize presentations to enable the use of multimedia and restructuring some of the documents’ more cumbersome sections. And the IFA recommends that information, such as a company’s finances or financial performance of franchisees, be better presented “to tell the story of franchise system health.”
The recommendations also would have third-party brokers selling franchises disclose professional experience, litigation history, industries represented, franchisees sold and more standardized information. The recommendations would also cover services they perform on behalf of franchisors and the compensation received.
The IFA doesn’t leave franchisees out of its recommendations for “responsible franchising,” noting that they should “fully investigate their investment by comparing multiple brands, reading the FDD and retaining a franchise attorney.”
The association also notes they should interview existing franchisees, though some systems have threatened franchisees that disclose negative information to prospective operators.
“Understand the risks of business ownership generally and the obligations they will have to many other parties related to the operation of a franchised business, such as suppliers, landlords and lenders,” the IFA noted.
The FTC last year opened a request for information on franchising and received thousands of comments from franchisors, franchisees, associations and suppliers.
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