Small Business Investment Protection Act now law in California

CALIFORNIA STATEHOUSE

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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Some franchisees face high termination risks

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A new analysis of Franchise Disclosure Document data shows that franchisees of some of the country’s biggest systems face a worrisome risk of losing their business because their franchisor terminates or refuses to renew their franchise agreement.

Earlier this year, Blue Mau Mau looked at annual franchisee termination rates in the lodging industry and called Motel 6 the “worst of the worst,” with a termination rate of 4.8 percent, and found four other systems with rates above 3 percent per year. A three in a hundred chance every year of losing your business adds up when your franchise agreement lasts for 10 years or longer.

We Are Main Street analyzed the termination rates of the 25 largest franchise systems, including hotels. The analysis also included non-renewals: While many non-renewals are the result of a franchisee’s decision, a franchisor’s refusal to renew is often another way franchisees lose their investment of money and years of effort. The analysis showed that, on average, in each year from 2006 to 2013, nearly 12 percent of the franchisees at cleaning company Coverall lost their businesses to termination or non-renewal. Three other systems have annual termination/non-renewal rates averaging 4 percent or more from 2006 to 2013: RE/MAX (the nation’s largest real estate franchisor by unit count),

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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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