IFA Submits Letter to CNBC for Upcoming Franchising Industry Documentary

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December 2, 2010
Darren Rovell
CNBC
900 Sylvan Avenue
Englewood Cliffs, New Jersey
07632

Dear Darren:
Thank you for the time you have recently spent with members of my staff to discuss
your upcoming CNBC documentary, “Behind the Counter: The Untold Story of
Franchising.” IFA believes the franchise model has successfully helped millions of
entrepreneurs get into business for themselves who might not otherwise have had
the opportunity to own their own business. We applaud you for taking such a deep
dive into the franchising industry and are hopeful that your story will showcase the
opportunities franchising can provide while also conveying useful information to
prospective buyers that would help them make an informed decision about whether
franchising is the best choice for them and their families.

We understand that your decision to not include us in your research early on was
because you wanted to profile existing companies and their current and former
franchisees. However, we would like to share some thoughts that you may not
have considered in order to put the entire industry into perspective.

Successful Relationships Mean Successful Businesses
The overwhelming majority of relationships between franchisors and franchisees
are cordial and productive. Most franchise companies have some mechanism
in place to foster continual communications between the two parties. Many
companies have franchisee advisory councils or similar forums to allow for
substantive franchisee input into the operations and performance of the brand.
Strong communication and coordination is critical to the success of the brand and
growth of the system and economic data show that franchise businesses have
been very successful in recent years.

The economic performance of the franchise industry indicates that the model is a
popular form of business and important to the success of the nation’s economy.
In the IFA Educational Foundation Economic Impact Study, Vol. 2, prepared by
PricewaterhouseCoopers, we reported that from 2001 to 2005 the franchising
sector expanded at a much faster pace than many other sectors of the U.S.
economy. Economic output grew by over 41 percent compared to only 26 percent
for all other businesses. Jobs generated by franchises grew by 12.5 percent,
compared to only 3.5 percent for other businesses – 3.5 times greater than nonPage
franchise businesses. Furthermore, the number of establishments grew by 18.5 percent
compared to 15.9 percent for all businesses. What this means is that franchise business
expansion – as an economic development model – is much more efficient at generating
economic output and jobs on the whole than other types of business development.

More importantly, these figures caught the eye of the U.S. Census Bureau about the
importance of franchising to the economy and led the Bureau to include franchising data in
their recently released Economic Census report information.

Franchisee Satisfaction is High Overall
In addition to the strong economic performance of the franchise industry, our data points out
that franchisee satisfaction is relatively high. In a July 2007 random survey* of franchisees,
85 percent of respondents had a somewhat or strongly favorable view towards franchising,
with 52 percent having a strongly favorable view. Of those surveyed, 23 percent cite the
access to business plans and the branded system as the key reason for having a favorable
view; 18 percent cite being associated with brand names; 14 percent cite the support they
receive in marketing and training. Importantly, 9 percent have an unfavorable view of
franchising. Of those with unfavorable views, 21 percent cite fees, 19 percent cite excessive
control and 16 percent cite broken promises as reasons for their criticism.

The survey also showed that 82 percent of franchisees described their business relationship
with their franchisor as somewhat or very favorable with 50 percent reporting that the view was
very favorable. Some 12 percent of the respondents had a very or somewhat negative view
with only 3 percent being very negative.

When asked if they had to make the decision to buy a franchise business over again, more
than four out of five (78 percent) respondents said yes citing the support, business plan and
brand name as the top reasons. Just 13 percent said they would not buy the franchise again
citing high fees and control issues as their dissatisfactions.

And finally, when asked if they would recommend to others to choose franchising versus
starting a business on their own, 64 percent said yes citing the support and backup compared
to 6 percent who said no and 28 percent saying that it depends.

Franchise Businesses have Tools Independents Don’t
While the majority of franchisees in the survey were satisfied, as I’m sure you found out in your
research, sometimes the relationships may turn sour and end, as I’m also sure you discovered
during this process. There are many reasons why businesses are not successful, but it is not
uncommon for businesses to fail. In 2008, the Small Business Administration reported that 30
percent of small businesses fail within the first two years and 50 percent fail within the first five
years.

IFA does not have statistics comparing business continuation rates for franchise businesses
versus non-franchise businesses. However, after reviewing franchising industry termination
and transfer rates over the past 20 years, the termination rates have averaged around 5 to
6 percent annually, with transfers at around 2 to 3 percent, bringing the overall turnover rate
of all franchise establishments to about 7 to 9 percent. In periods of economic recession the
turnover rates are slightly higher and in periods of economic expansion the rates are slightly
lower. But in general, this indicates that over time, on the whole, franchise businesses have
a much higher business continuation rate than non-franchise businesses. Otherwise, the
termination rates on an annual basis would be much higher.

Both the low termination rates and the high productivity rates indicate that franchising is a
very healthy business model—one that is very adaptable to economic conditions, both in good
times and bad. Given a stable economic and regulatory environment, the franchising industry
excels at generating new businesses (with high productivity) and creating jobs.

The Franchise Industry Discloses More Information than Any other Business
In both scope and quality, the nature of the disclosure required under the Federal Trade
Commission’s (FTC) Franchise Rule far exceeds the information available in any other
comparable business transaction. The IFA strongly supports the pre-sale disclosure approach.
The franchise business model has been regulated by a specific rule at the FTC since the
1970s. During the most recent revision of this rule in 2007, FTC staff spent thousands of hours
considering every facet of the issue. Stakeholders from all segments of the franchise business
community testified and submitted written comments, and the FTC reviewed the accumulated
commentary thoroughly. In crafting the new rule, the FTC wisely resisted the temptation to
increase regulation on the franchise business model based on a few isolated cases. Instead,
the agency directed its efforts toward improving the quality of pre-sale disclosure so that
potential franchise investors would be well informed. The agency concluded that the franchise
marketplace was sufficiently diverse in terms of contract terms and offerings that any individual
seeking a franchise purchase could reasonably protect themselves from harm by reading the
disclosure document and comparison shopping.

I should also note that the IFA has steadfastly supported states and the federal government in
their enforcement efforts when franchisors fail to abide by the law. In fact, the IFA administers
an alternative law enforcement and monitoring program for minor violations of franchise
disclosure laws. When states or the FTC determine that a franchise company has failed to
provide adequate disclosure, one option is referral to the IFA’s Sales Compliance Training
Program for mandatory remedial training.

In addition, the IFA provides a free Franchise Ombudsman Program for franchisees who want
to work with a professional conciliator to open up a confidential channel of communication with
their franchisor. The association also works closely with franchisee associations to promote
litigation alternatives through the Franchise Mediation program.

We feel strongly that creating and facilitating tools for franchisors and franchisees to work out
disputes is in the best interest of all parties. But there are times when legal action is taken.
Based on a review of a random sample of over 100 disclosure documents, litigation/arbitration
between franchisor and franchisee is very limited when put into an industry-wide perspective.
Our analysis shows that many small franchise systems (those with less than 50 units) often
have no pending litigation/arbitration cases or very few cases. Medium size franchise systems
are likely to have one or two pending cases. Larger franchise systems, as the number of units
increase, are likely to have more pending cases (4 to 5). However, as a percentage of the
total number of units, these franchise systems have fewer pending cases on average than
smaller franchise systems, when taking into account their system size.

IFA Provides a Host of Tools to Help to Foster Sound Business Practices
To help franchise business executives understand the fundamentals of operating a successful
franchise business, the IFA launched the Institute of Certified Franchise Executive (ICFE)
program in 1985 to enhance the professionalism of franchising by certifying the highest
standards of quality training and education. ICFE offers a wide range of continuing education
programs for professional development. Meeting the requirements of the program and
completing the course of study leads to the Certified Franchise Executive (CFE) designation.

More than 1,300 franchise executives now participate in the Certified Franchise Executive
program, including more than 600 industry executives who received their CFE designation.
Forty percent of IFA member companies now have one or more CFEs or CFE candidates
enrolled in the program.

IFA and the Institute of Certified Franchise Executives launched a major initiative in 2010 for a
greatly expanded franchise sales management and compliance program Fran-Guard™. As
part of ICFE’s continuing educational and professional development program, Fran-Guard
covers both the legal and business aspects of compliance. The program is designed to help
IFA members take proactive steps to reduce risks, management growth and build stronger,
healthier franchise systems.

In addition, IFA members have access to continuing education opportunities through regular
online webinars and the IFA University. More information can be found at
www.ifa-university.
com/home.

IFA Provides Tools for Prospective Franchisees to Make Sound Business Decisions
IFA provides basic how to information to the public and prospective franchisees through
seminars at franchise expos and seminars in major cities across the country as well as a
host of information on its web site franchise.org. This information includes extensive legal
information that needs to be considered and ways for prospects to determine if franchising is
right for them. IFA, in cooperation with other national organizations, conducts more than 20
seminars throughout the year for women, minorities and veterans on franchising.

In addition, IFA has recently updated the popular Introduction to Franchising publication to
help prospective franchisees and opportunity seekers to more fully understand the franchise
model. The publication provides prospective franchisees with questions they need to ask
prior to making their investment to determine if franchising is right for them. A copy of the
update is attached to make it easier for consumers to find basic franchising information.

Finally, the FTC’s Consumer Guide to Buying a franchise is reprinted within the IFA Franchise
Opportunities Guides, published twice a year, and is posted on IFA’s Web site.
Darren, we truly hope you find this information useful and pertinent for your viewers and
respectfully urge you to post this letter and the FTC Consumer Guide and the Introduction to
Franchising publication on your Web site. It is important to highlight the do’s and don’ts when
purchasing a franchise business and to reiterate, we sincerely applaud you (and CNBC) for
taking such a comprehensive look into the franchising industry. We are confident that your
segment will also put into perspective the overwhelming growth of the franchise industry and
the successful relationships between franchisors and franchisees that have allowed these
businesses to flourish.

Please let me know if you need further information or have questions about franchising.
We are more than willing to help you tell the full, accurate and uniquely powerful story of
franchising.

Sincerely,
Stephen J. Caldeira
President & CEO

International Franchise Association
Click here for a PDF version of the Letter

*The survey was conducted May 5-May 22, 2007 by APCO Insight, an independent research firm in Washington, D.C. The sample size was 400 and drawn from a random sample of a list of franchisees prepared by FRANdata of Arlington, Va. The margin of error was plus or minus 5 percent. The respondents represented the following industry categories: 23 percent were from quick service restaurants, 10 percent were from retail, 9 percent were from maintenance services, 8 percent each from lodging and real estate, 6 percent each from automotive and business services, 4 percent were from baked goods, 3 each were from building and construction and restaurants, 2 percent each were from education, printing, retail food, and travel and 1 percent each were from child related, personal services and sports and recreation. 

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