Most states lack key protections for franchisees

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Our new, comprehensive guide to state franchising laws finds that 32 states do not have laws that protect small-business franchisees from abusive franchisor practices. The analysis of franchise laws, available here, allows current and potential franchisees to better understand franchise-specific legal protections, which are too scarce.

See the state-by-state guide:
www.wearemainst.org/map  

To spur reform, We Are Main St. is reaching out to every member of the legislatures in 49 states, calling on them to establish franchisee-specific protections where there are none and strengthen laws where they exist. Working with franchisees, the group helped push through the nation’s strongest pro-franchisee legislation in California last year and is not contacting lawmakers there. Hawaii, Minnesota and Pennsylvania are currently considering legislation to strengthen franchisee rights.

“There are unique risks inherent in franchising because of  the profound imbalance of power between franchisors—often large, multinational companies like McDonald’s—and small-business franchise owners,” said Joan Moriarty, Director of We Are Main St. “Hardworking franchisees should have the necessary, common-sense protections that create an even playing field. These changes promote stability and prosperity for small business owners and the people they employ.”

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California franchisees face 3-in-10 SBA loan failure rate

Small Business Investment Protection Act now law in California

Nearly three in ten Small Business Administration loans to California franchisees in recent years have failed. That’s according to a new analysis by the Service Employees International Union of over 7,000 loans made to California franchisees over a 20-year period. As the San Jose Mercury News reported, the study shows that franchise owners in California “have a harder time staying current on their loans than in the rest of the nation.”

The failure rate on California SBA franchise loans made between 2006 and 2010 – the most recent period analyzed – is more than double the failure rates in earlier periods. The loans analyzed were made by banks and other private lenders through the SBA’s flagship 7(a) Loan Program.

The failure rate is the percentage of loans to California franchisees that the SBA charged off its books. Such charge offs happen after lenders liquidate all the borrowers’ collateral, which can include their home or other personal assets. Loan failures represent a financial disaster for the borrower, who may have lost both business and personal assets, and a loss for taxpayers, since the SBA has to write off the uncollected value of the loan.

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Bloomberg: ‘Franchise Loans Keep Blowing Up, and the Government Keeps Backing Them’

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Full report: “Risky Business: Franchisees’ High and Rising Risk of SBA Loan Failure

That’s the headline of a BloombergBusiness article about We Are Main Street’s study of Small Business Administration loans to franchised businesses.

“Buying a franchise is a risky business. Seventeen percent of franchise loans guaranteed by the U.S. Small Business Administration failed between 1991 and 2010, new data show. At the end of the period, nearly one in five franchise owners went splat.”

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“The loans, made by private lenders, weren’t merely delinquent. Failed loans are those charged off by the SBA, which guarantees up to 85 percent of the value of working-capital loans through its 7(a) program. Even after liquidating collateral, which can include franchise owners’ homes, the government had to use taxpayer dollars to make the lenders whole.”


“Data provided to Bloomberg by the SBA show that working-capital loans to franchises haven’t performed as well as loans to non-franchise businesses.”

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Poll: Small-Business Franchisees Face Goliath Franchisors

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A new poll finds that a majority of owners of franchised businesses have taken on significant debt to buy their franchise, have experienced franchisor-imposed changes that raised costs but not revenue and have faced the threat that their franchisor will take away their business. The poll of over 1,100 franchised business owners also found that franchisees are overwhelmingly small enterprises: Most own only one unit, and most run their businesses at break-even or a loss.

The survey was conducted as franchisee rights legislation advances in California, and the poll finds that in some areas California franchisees face stiffer challenges than those in the rest of the country. The poll was conducted by FranchiseGrade.com, Inc., a leading market research and analysis firm for the franchising industry and was commissioned by Change to Win, a federation of unions that includes the Service Employees International Union, the United Food & Commercial Workers, the Teamsters and the United Farm Workers.

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