Report: Most franchisors don’t disclose franchisee expenses

Report: Most franchisors don’t disclose franchisee expenses

The vast majority of franchisors fail to reveal any franchised unit expense information in their Franchise Disclosure Documents, according to a new report by independent market research firm Franchise Grade also finds that healthy franchise systems are more likely to make at least some disclosure about their system’s financial performance than unhealthy ones.

Franchise Grade reviewed financial performance representations in Item 19 of the FDD for 1,880 franchisors, broken down into 1,027 “healthy” systems and 853 “unhealthy” ones using a proprietary benchmark. The report found that 82 percent of the healthy systems and 91 percent of the unhealthy systems made no disclosure of unit expenses.

Without expense data, it is virtually impossible for a prospective franchisee to project how profitable a franchise will be and thus whether investing is worth the substantial risk. This parallels the analysis in a petition filed with the Federal Trade Commission, which found that 10 of the 14 leading systems surveyed provided no information on franchisee expenses in Item 19.

Some of the expense information franchisors do provide is inadequate for prospective franchisees. For example, McDonald’s Item 19 provides no data on rent,

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Small Business Investment Protection Act now law in California


California now has one of the country’s strongest franchisee protection laws after Gov. Jerry Brown signed the Small Business Investment Protection Act earlier this month. The signature capped years of effort by franchisees to pass franchisee rights legislation in the Golden State.

“The law protects franchise owners from franchisors who seek to terminate their business on a whim or from franchisors who desire to take possession of a lucrative franchise without compensating the franchise owner,” wrote Don Sniegowski on franchisee news site Blue Mau Mau.

Under the new law:

  • It will be harder for franchisors to terminate franchisees, and franchisees will have more time to fix most violations before they can be terminated.
  • Franchisors will have to buy certain items from franchisees if they terminate or refuse to renew a franchise. This means franchisees will not lose every dollar they invested if a franchisor terminates or refuses to renew them.
  • Franchisees will have an easier time selling their units: Franchisors will have to approve proposed sales if the buyer is qualified and the franchisee follows the franchisor’s transfer process.

The Service Employees International Union joined forces with franchisees to press for the bill.

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Shuttered Quiznos highlights franchise failure problem

Another Quiznos franchisee is closing shop, accusing the sandwich chain of “leaving me out to dry.” After almost 20 years of running a St. Louis-area shop, Mike Barron joined the thousands of Quiznos franchisees who have shut their stores in recent years, as Quiznos shrank from 5,000 units in 2006 to about 1,000 last year. Barron told his hometown paper that:

…the company has done little to support franchisees while shifting away from its menu with new items that have not been as successful. … “They don’t want to help. I thought if I stuck around I would reap the rewards of it all. Everything would come my way, but my sales went down.”

Earlier this year Quiznos told franchisees it planned to “aggressively close underperforming stores, and to aggressively default franchisees and bring back fines for franchisees that are not following company operating procedures.”

Unfortunately, the problem of franchisee financial distress goes far beyond Quiznos: A WeAreMainSt report found that federally guaranteed loans to franchisees are failing at a high and rising rate. As the head of franchising research group FranDATA observed:

…for most single-unit franchisees the cost of a failed unit is absolute and often devastating.

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NY Times urges ‘Fairness for Franchise Businesses and Workers’


The New York Times is urging Calif. Gov. Jerry Brown to sign the Small Business Investment Protection Act (AB 525):

…developments in franchise law in recent decades have increasingly reduced the power of franchisees in dealings with their corporate parents. The result has been lower franchisee profits and lower worker pay, while corporate profits and executive compensation soar.

Worse, the imbalance of power has been largely impervious to reform, until now. A bill in California awaiting the signature of Gov. Jerry Brown would strengthen the legal rights of franchisees in the operation, sale and closing of their businesses.

The bill prohibits the most egregious corporate practices, including the termination of franchises for minor violations of the franchise agreement. Such terminations can ruin a franchisee, but benefit the corporate parent, by allowing the corporation to sell the franchisee’s location at a higher price to a new owner.

The Times notes that the problem goes far beyond California and mentions the petition to the Federal Trade Commission seeking an investigation into abusive franchisor practices. “By signing the California bill, the governor would help in the drive to improve profits and pay at franchise businesses and show the federal government where it needs to go at the national level.”

You can take action to make a difference for franchisee rights: Urge Gov.

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