In recent years, the federal and several state governments have introduced legislation that would codify franchise contracts into law, which would increase regulation on small business owners, reduce franchisee equity, damage brand standards and public safety, and insert the federal and/or state government into all preexisting and future contracts.
These bills, commonly known as "franchise relationship" legislation, would damage the entirety of a franchise system. This legislation would remove a brand's ability to maintain its standards of operations, cleanliness, and safety, allowing substandard locations to harm the overall reputation of the brand and its franchise owners. Ultimately, these bills help substandard franchise operators at the expense of owners who work to maintain their contractually agreed-upon standards of operation.
IFA supports regulatory policies designed to ensure that prospective franchisees receive relevant information about their proposed franchise purchase with sufficient time and information to make an informed and unpressured decision. These regulatory policies, namely the Federal Trade Commission's (FTC) Franchise Rule, seek to maintain a proper balance between the legitimate disclosure needs of prospective franchisees, and the compliance burden and costs borne by franchisees and franchisors alike.
Franchisees and franchisors are already considered equal parties entering into contract under U.S. and state law. Franchisors are legally required to provide extensive disclosure documents to franchisees before entering into a franchise agreement to help ensure that both parties understand each other’s expectations and obligations. Franchise agreements, like any other contractual agreement, set forth guidelines and expectations that each party reviews, understands and agrees to (or negotiates upon) before mutually signing. These agreements and the standards under which franchise businesses operate are designed to help ensure a uniform and quality experience for customers.
A group of bipartisan members of Congress sent a letter to the Federal Trade Commission (FTC) urging to leave the FTC's franchise rule in its current form. The letter notes that the rule was updated a little over a decade ago following a 10-year-long, constructive, consensus-based process that included regulators, franchise brands and franchise owners. Since then, the rule has driven franchisors to increase transparency into their systems’ financial performance disclosures, with 66% of franchisors disclosing revenue information in their Item 19s in 2017 compared to only 52% in 2014. By requiring clear and consistent disclosure of information at the outset of all franchise relationships, and through its evenhanded federal application, the existing rule allows for better-performing franchisors and franchisees to succeed together. Read the full letter here.