Franchising is a major business model in the U.S., contributing billions of dollars in sales and employing millions of workers. It spans many industries such as fast food, hotels, and gyms. Franchising provides individuals with the chance to own their own business, backed by the brand name, marketing support, and operational guidance from larger, well-established companies.
However, franchising comes with risks, and franchise owners often face challenges due to the brand’s requirements. In today’s blog post, we explore a recent report highlighting the difficulties franchise owners encounter. We also examine how the Federal Trade Commission (FTC), which regulates franchising, gathers information about franchise owners’ concerns.
Franchise Owners Have Limited Control Over Business Operations
There are many appealing aspects of owning a franchise, which is why the model is so popular. But some franchise owners we’ve spoken with have encountered difficulties following the brand’s guidelines. For instance, some brand owners require franchisees to use specific suppliers that charge higher-than-market rates. Franchisees also expressed frustration that advertising fees were used for other brands and not necessarily for their own benefit. They are often required to keep their businesses open during certain hours, even if it leads to financial losses. Additionally, franchisees must pay the brand owner a percentage of their gross income to use the brand’s name and business model, even if the franchise is not profitable.
Potential Franchise Owners May Overlook Important Information
New franchise owners may not always grasp the full scope of a franchise agreement. The FTC requires brand owners to provide written disclosures that contain essential information about the franchise arrangement, enabling prospective buyers to weigh the pros and cons.
Despite the importance of these disclosures, potential franchisees do not always fully read or understand them, as noted by attorneys, state officials, and trade association members we interviewed. This may be because the disclosures are often lengthy and difficult to read. Some prospective franchise owners might also rely on information from brokers or sales representatives rather than thoroughly reviewing the disclosures. Language barriers or limited business experience may further complicate understanding.
The FTC has created an educational guide to help prospective franchisees understand the challenges they might face and the key parts of the disclosure document. However, most franchise owners we spoke with were unaware of the guide. Having access to this information could have given them a clearer understanding of the commitments they were making. Because of this, we suggested that the FTC improve its efforts to inform potential franchise owners about the importance of the disclosure document and better promote its guide.
Franchise-Related Issues May Be Underreported
The FTC uses consumer complaints to guide its oversight and enforcement of many consumer protection laws. We reviewed data the FTC collects on complaints. Between 2018 and 2022, there were about 5,900 franchise-related complaints, making up less than 1% of all complaints the FTC received about fraud or deceptive practices.
Franchise owners, attorneys, and state officials offered reasons why franchise owners might not file complaints with the FTC about questionable practices by brand owners. One key reason was that many franchise owners were unaware they could file a complaint. When we asked franchisees in nine discussion groups whether they had filed a complaint with the FTC, participants in eight groups said they had not. Some franchisees also didn’t realize the FTC’s ReportFraud.ftc.gov website could be relevant to their issues because they didn’t view their concerns as fraud-related.
Additionally, franchisees may hesitate to file complaints out of fear of breaching their contracts by speaking out against their brand owners. The reasons franchisees gave for not filing complaints, the serious concerns they shared with us, and actions taken by some state regulators all suggest that franchisee concerns are likely underreported to the FTC. To address these issues, we recommended that the FTC boost its outreach and education efforts to inform franchisees about their rights. We also suggested that the FTC collaborate with stakeholders to improve awareness and understanding of the complaint process.
