Franchisees demanding FTC investigation

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Franchisees are urging the FTC to investigate abuses in the franchising industry through an online petition launched by WeAreMainSt.

The problems franchisees face are national: Rising demands for expensive investments; unfair terminations; blocked sales. An investigation by the FTC, which oversees franchising, will show the need for a national solution.

The online campaign supports the request for investigation that SEIU filed with the FTC in May.

“The Franchise system desperately needs reform,” said Kathryn Slater-Carter, a former McDonald’s franchise owner from California’s Bay Area. “The Federal Trade Commission needs to investigate on behalf of the small-business owners whose investments of sweat and savings make franchising work.”

Franchisees can sign the petition here.

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FTC Petition Receives National News Coverage

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On May 18 the Service Employees International Union petitioned the Federal Trade Commission to investigate the franchise industry. The request for investigation offers an extensive review of franchise agreements and franchise disclosure documents for 14 of the country’s largest franchise systems. The review finds a profound power imbalance in the industry, documenting how franchise agreements often allow franchisors to terminate franchisees for minor violations, and how franchisors often provide inadequate financial information to prospective franchisees. The filing elicited a flurry of news coverage, some of which is detailed below.

Politico (behind paywall):

The petition cited studies, surveys and articles accusing major franchisors of misrepresenting financial performance prospects to potential franchisees. The document asserted that franchisors retaliate unfairly against franchisees who join associations to lobby for fairer terms — some contracts ban participation in such associations outright — and often terminate franchise contracts on slender pretexts after franchisees have made an enormous cash investment.

Although the franchisor-franchisee relationship is regulated almost entirely at the state level, the FTC’s Franchise Rule and Business Opportunity Rule police the transparency of agreements between franchisors and franchisees. The petition asserts that “franchisees often enter into the relationship on the basis of inadequate or misleading financial performance information.”

Bloomberg noted some of the specifics of the FTC petition,

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SEIU petitions federal watchdog to investigate franchise industry

SEIU petitions federal watchdog to investigate franchise industry

Citing evidence of a dramatic power imbalance between the nation’s top franchisors and their franchisees, the Service Employees International Union petitioned the Federal Trade Commission on May 18 to launch an investigation into the franchise sector and issue recommendations for curbing ”abusive and predatory” practices by franchisors.

The request for investigation marshals evidence from an extensive review of franchise agreements and disclosure documents for 14 of the country’s largest franchise systems. The review found that franchise agreements are consistently one-sided, often allowing franchisors to terminate franchisees for minor violations of thousands of pages of ever-changing rules and to refuse to renew franchise agreements for any reason or no reason at all.

[Read SEIU’s petition to the FTC]

The 32-page petition also contends that franchisors often provide inadequate information on the main issue of concern to potential franchisees: the financial performance of franchised units. This makes it all but impossible for many potential franchisees to make an informed decision on whether to invest.

The petition calls on the FTC to use its investigative authority to compel top franchise companies to turn over information about their franchising practices.

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