IFA Releases Policy Recommendations to Strengthen Consumer Protections and Improve Franchise Disclosures
Recommendations include improvements to FTC pre-sale disclosure, franchisee due diligence, and third-party seller disclosures that will encourage Responsible Franchising</span></em></p>
WASHINGTON</strong> – The International Franchise Association (IFA) today released a series of new policy recommendations for franchisors, franchisees, and suppliers to strengthen the franchise model and improve outcomes in franchising. The recommendations stem from the findings of a year-long working group comprised of IFA members seeking improvements to the disclosure process before a franchise is sold, established as part of IFA’s long-standing commitment to promoting Responsible Franchising.</span></p>
“IFA was founded nearly 70 years ago based on the principle that robust pre-sale disclosure is the bedrock of responsible franchising and critical in setting clear expectations at the outset of a long-term relationship between brands and franchisees,” said IFA President and CEO Matt Haller.</strong> “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 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.”</span></p>
The full set of Responsible Franchising principles is available </span>here</span></a>. They include:</span></p>
Recommendations for Franchisors</u></strong></span></p>
IFA recommends information in their Financial Disclosure Document (FDD) be presented in the following format:</span></p>
- Shifting to a conversational, question-and-answer style of disclosure</span></li>
- Adding an executive summary to facilitate an apples-to-apples comparison of franchise opportunities within an industry</span></li>
- Restructuring sections containing cumbersome tables with illustrative examples and explanatory text</span></li>
- Presenting information such as Initial Investment (Item 7), Financial Performance Representation (Item 19), Franchisee Information (Item 20), and Financial Statements (Item 21), better to tell the story of franchise system health</span></li>
- Modernizing the presentation of the FDD to enable the use of multimedia</span></li></ul>
Recommendations for Franchisees</u></strong></span></p>
- Fully investigate their investment by comparing multiple brands, reading the FDD and retaining a franchise attorney</span></li>
- Validate any franchise opportunity (as well as the franchise seller presenting the franchise opportunity, as further discussed below) through interviews with existing franchisees</span></li>
- Understand the risks of business ownership generally and the obligations they will have to many other parties related to the operation of the franchised business, such as suppliers, landlords and lenders</span></li></ul>
Recommendations for Suppliers</u></strong></span></p>
IFA recommends the following disclosures be adopted for third-party franchise sellers:</span></p>
- Recent professional experience</span></li>
- Litigation history</span></li>
- Services performed on behalf of franchisors and compensation received</span></li>
- Industries represented and the number of brands represented within each industry</span></li>
- Franchisees to whom franchises were sold during the prior calendar year</span></li>
- Standardized information about the different categories of third-party franchise sellers and questions a prudent prospective franchisee may ask their third-party franchise seller</span></li></ul>
These recommendations align with IFA’s </span>core principles of responsible franchising</span></a>, which IFA believes should be practiced intentionally and consistently among franchisors, franchisees, and suppliers to protect the integrity of the franchise model and the stakeholders it serves.</span></p>
“It is the collective obligation and responsibility of all of us in franchising to commit to doing our part to make franchising stronger and leave it in a better place than when we joined,” said Steve Hockett, Great Clips CEO and IFA Board Chair.</strong> “These recommendations are critical building blocks for lasting improvements to the franchise business model and preventing regulatory overreach that would be detrimental to the work we do and the lives we impact. By making a concentrated effort to embrace responsible franchising, we are ensuring that future franchise business owners will have the same opportunities we have experienced, and hopefully far more.”</span></p>
“Franchising is too often misunderstood as a business model, but it is truly a win-win design that has the power to change lives, families, and communities,” said David Humphrey, Planet Fitness franchisee and IFA Past Chair. </strong>“When franchisees succeed, franchisors succeed and vice versa – along with everyone they serve. By providing more accessible information at the very beginning of the franchise sales process, we can better ensure both the franchisor and franchisee are set up for success. This business model has done so much for millions of people worldwide, and it is it is our responsibility to ensure it is protected so it can continue to be the great pathway to prosperity for the next generation and beyond.”</span></p>
Announced at IFA’s Legal Symposium May 6-7 in Washington, D.C., these recommendations were developed by working groups comprised of representatives of the key stakeholders in franchising—franchisors, franchisees and suppliers (including seasoned franchise attorneys, consultants and third-party franchise sellers).</span></p>
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- Litigation history</span></li>
- Validate any franchise opportunity (as well as the franchise seller presenting the franchise opportunity, as further discussed below) through interviews with existing franchisees</span></li>
- Adding an executive summary to facilitate an apples-to-apples comparison of franchise opportunities within an industry</span></li>