Small Business Franchising: An Overview of the Industry, SBA’s Role, and Legislative Proposals U.S. Senate Committee on Small Business & Entrepreneurship
March 16th, 2022
As mentioned in previous posts, I intended to provide an overview of the discussion with the U.S. Senate Committee on Small Business and Entrepreneurship that took place on March 16th.
The Honorable Senator Cortez Masto provided testimony speaking about her proposed legislation Bills S.1120 and S.2162. Copies that are referenced and made part of this article.
Panel number one consisted of the Honorable Senator Cortez Masto providing testimony.
Panel number two consisted of the following persons providing testimony:
Robert W. Emerson Huber Hurst Professor of Business Law Warrington College of Business University of Florida
Aaron Yelowitz Professor of Economics, University of Kentucky Senior Fellow, Cato Institute
Bryan Tipton Owner, Tipton Investments
Leanne Stapf, Chief Operating Officer, Multi-Unit Franchise Owner of The Cleaning Authority
And finally, we add the statement submitted (entered into the record but not testified) by the International Franchise Associations C.E.O, President Matthew Haller, and IFA Lawyers.
Copies of the testimonies and statements are made part of this article.
Beginning with the testimony provided by the Honorable Senator Cortez Masto of Nevada.
Chairman Cardin, Ranking Member Paul, and distinguished members of the committee:
Thank you for inviting me to testify about the role the Small Business Administration can play in protecting franchisee borrowers from harmful practices in the franchise industry. There are terrific franchise corporations out there that provide opportunities for entrepreneurs to own successful businesses. But there are also franchise corporations that treat entrepreneurs incredibly unfairly.
Last year, I released a report detailing how the franchise system has left some entrepreneurs financially devastated. I’ve heard from Nevadans who have lost their retirement funds, their life savings, and their homes trying to repay loans on unprofitable businesses. Our small business owners don’t expect their businesses to be risk-free. But if they purchase a franchise, they absolutely deserve to know what they’re getting into.
Right now, that’s not always the case, and the Small Business Administration can do more to fix it. The SBA is the go-to source of funding for many new franchises. My report indicates that franchise loans make up 13% of the SBA’s total loan portfolio. In 2019 alone, SBA guaranteed more than 7,000 loans to franchise owners. Yet some franchise brands consistently see high rates of default. And the SBA Inspector General has repeatedly raised concerns about these high-risk franchises.
This is why it matters: Franchise owners often sign a personal promissory note. If they can’t pay the loan from profits from the business, they will be on the hook for repaying the loan from their savings, their retirement funds, or their homes. If those assets are not enough, the SBA will pay off the loan. Those repaid funds are paid for by other small business borrowers and sometimes, the taxpayers.
I recommend that the SBA require franchise corporations to share historical financial performance data with the potential franchise owners before the SBA guarantees a loan. It’s a simple step that could help investors avoid devastating defaults. I’ve introduced two bills that ensure franchisee borrowers have access to the critical historical financial information they need.
The SBA Franchise Loan Default Disclosure Act requires the SBA to publish default rates by franchise brand over the past decade. This is simple: Every lender reports to the SBA monthly on loan performance. The SBA can easily make default rates on loans it guarantees publicly accessible on its website. Publishing defaults by brand gives entrepreneurs information about the risks they might face.
The second bill, the SBA Franchise Loan Transparency Act, requires franchise corporations to give accurate historical financial performance information to anyone applying for SBA government-backed loans. When I talk with franchise owners, they repeatedly tell me that they did their research before investing. Yet prospective franchise owners are not getting all the historical financial performance data they need. Any information they get in the Franchise Disclosure Document is required by law to be accurate. But because franchise corporations know that everything in the FDD has to be accurate by law, some of them intentionally leave out key pieces of financial performance information. Instead, they will give that information to franchise owners outside the FDD—where they can present it in an overly rosy or inaccurate way.
My bill requires the franchise corporations to provide specific historical performance data in the FDD so that borrowers can make an informed decision about the risks they face. People buy franchises because they want to invest in a business that’s proven successful. Only brands willing to share revenue data on how their franchises have performed in the past should earn the privilege of having their investors receive SBA-guaranteed loans. In that sense, my bill sets a standard for franchise corporations.
Although I’ve introduced bills to make these changes, the Small Business Administration has the power to take these steps on its own. Many franchises are wonderful business opportunities for hardworking Nevadans. We need to do more to ensure that all franchise owners have that experience. The SBA should not be guaranteeing high-risk loans. I’ll continue to work with the members of this committee to make much-needed changes that protect hardworking franchise owners.
End – Sen. Cortez Masto Statement / Testimony
Our review – Senator Cortez Masto has proposed two pieces of legislation that accomplished two straightforward changes using the Small Business Administration data, readily available and easily made public. It is important throughout this review that the reader keep this in mind. Its simplicity and execution are what makes it hard to understand why anyone, except those who either don’t understand it, those that attempt to call it something it isn’t, or, those that wish to hide this data from Prospective Franchisees doing their due diligence before entering into a franchise agreement.
Simply put, what is it that Senator Cortez Masto has proposed? Let’s summarize:
S.2162 would have the Small Business Association make public the default rates on SBA loans, by brand, for the last ten years and through the current period. Readily available information that could easily be posted on their website, made public, and accessible to those researching franchise brands before entering into franchise agreements. So simple in fact that the SBA doesn’t even require legislation to accomplish this. It undoubtedly would provide insight into brands, both positive and negative, relative to the success of Franchisee borrowers and their ability to pay back or not to pay back the SBA guaranteed loans.
S.1120 would have franchise companies provide accurate, relevant, and concise financial performance representations (FPRs) setting a standard for what must be included if they add this information into their respective Franchise Disclosure Document as required by law (FDDs). They may not, by the sin of omission, leave pertinent and important data out of #Item 19 only to have it surface in other forms of media, reviews, outlets, interviews, printed or oral, where that data is not indicated and made available in the FDD as Item # 19 referred to as Financial Performance Representations.
Relative to both of these proposed suggested slight modifications it begs the question, why would any company involved in franchising, or organizations purporting to represent franchising, be opposed to the transparency these proposals seek to surface? Let me state it again. Either they don’t understand it, they’re attempting to call it something it isn’t, or, they wish to hide the data and information from Prospective Franchisees doing their due diligence before entering into a franchise agreement. The true “Elegance” of these proposals is in their simplicity and the incredible benefit that would be realized by Prospective Franchisees conducting their research.
End – Senator Cortez Masto Statement / Testimony Review
Submitted statement by Matthew Haller, C.E.O. and President of the International Franchise Association and IFA attorneys.
In the interest of full disclosure and transparency, I will include the entire statement; however, because it is incredibly wordy and replete with standard IFA format hyperbole, I will reference by endnote those portions that are clearly, in my opinion, extraneous and an attempt to cause a diversion from the precise matters being proposed and discussed.
Beginning with a submitted statement by Matthew Haller, C.E.O. and President of the International Franchise Association (IFA) and IFA attorneys.
Chairman Cardin, Ranking Member Paul, the International Franchise Association (IFA) appreciates this opportunity to submit its views to the Senate Small Business and Entrepreneurship Committee in connection with the Committee’s March 16, 2022, hearing on the topic of “Small Business Franchising: An Overview of the Industry, SBA’s Role, and Legislative Proposals.”
By way of background, the IFA is the world’s oldest and largest organization dedicated to representing and protecting the interests of franchising worldwide. The IFA’s members include franchisors, franchisees, and professionals who supply goods and services to the franchise sector of the U.S. economy.
Initially, we note that the IFA takes no position with respect to S. 1120, the proposed “Small Business Administration Franchise Loan Transparency Act of 2021” or regarding S. 2162, the proposed “SBA Franchise Loan Default Disclosure Act.” [i]
Our comments focus on the issues that the Committee is considering that underpin the proposed legislation. [ii] Recent Franchise Cases. We understand that among the concerns that the Committee seeks to address are the well-publicized misfortunes of two franchisors in particular – the franchisor of the “BurgerIm” and “Dental Fix” brands. The franchisor of the “BurgerIm” system, for example, has been the subject of enforcement actions by the Federal Trade Commission and the California Attorney General’s office. IFA applauds these law enforcement agencies’ efforts, which endeavor to investigate and, where needed, bring cases to enforce the law. [iii]
We strongly believe that the BurgerIm matter would neither have been prevented nor solved by the proposed legislation. Rather, a proper review of BurgerIm’s April 2019 IFA Submission to the Senate Committee on Small Business and Entrepreneurship March 16, 2022 Page 2 franchise disclosure document (FDD) that was submitted to the California regulators would have revealed two key details that should have served as a flashing red light: [iv]
First, the franchisor had an especially high rate of franchises that were sold but not yet open. In particular, Item 20 of BurgerIm’s FDD revealed that there were 452 sold-but-not-yet-opened franchises, compared with 109 operating at the end of FY18. Second, the franchisor’s financial statements for FY18 – Exhibit “A” within the BurgerIm FDD – revealed that over 98% of its FY18 revenue was derived from initial franchise fees ($20,401,948), contrasted with a relatively low level of “other” revenue (which included royalties): $329,926. Because royalties are a byproduct of franchisee operations, the paltry level of royalties exposed the extremely unhealthy nature of the BurgerIm system.
Those two “flashing red lights” should have served as a conspicuous warning to prospective franchisees, their lawyers, auditors, and advisors as well as other interested parties, such as lenders, banks, and even state franchise regulators. [v]
Franchising In General As noted by FRANdata in its recently released 2022 Franchise Outlook, “[f]franchising helped lead the economic recovery in 2021. By providing advancement opportunities at all levels of the economic ladder, from entry-level to manager and from manager to owner, franchises across America aided not only large-scale reentry into the workforce but also the possibility of coming back better than ever. The unique business model also put the overall economy on more solid ground, with steady growth on business openings and output contributions. Owing to pent-up demand and strong consumer spending, in 2021 total output generated by franchised establishments improved significantly by 16.3%, to $787.7 billion. “Much like the broader GDP growth trend, estimated nominal GDP growth contributed by franchising reached an all-time high of 6.2% in 2021. These figures have a real impact, not just in benefitting the U.S. economy overall, but also down to the individual level. Across America, people are turning to franchises to strengthen their own financial outlook. “Still, headwinds in the current economy will have an impact, with franchise growth in 2022 expected to stabilize. With robust sales growth, new unit development, and job creation, franchising is projected to expand by 2.2%, reaching 792,014 in franchise establishments, which is 17,000 higher than that of 2021. Franchise employment is forecasted to grow at a slightly lower rate of 3.1% to a total of 8.5 million jobs, but it is anticipated to recover to pre-pandemic levels following two years of COVID-era contraction.
That is a net gain of almost 257,000 jobs compared to 2021. The output of franchise businesses in nominal dollars is forecast to improve by 4.9% to $826.6 billion in IFA Submission to the Senate Committee on Small Business and Entrepreneurship March 16, 2022 Page 3 2022. Franchises’ GDP contribution to the overall economy will remain stable at 3% in 2022, but the growth rate is likely to slow to 5.7%, still higher than the pre-pandemic level, to a total of $501 billion.” Franchised businesses offer unique opportunities to local entrepreneurs and underrepresented groups at disproportionate rates, especially to minorities, women, and immigrants, with nearly 26% of franchises being owned by people of color, compared to 17% of independent businesses. Franchised businesses generate 2.3 times as many jobs than their non-franchised counterparts, and franchises pay wages that are 2.2 to 3.4% higher than similar non-franchised businesses.
Conceptually, a franchised business does not have standards imposed by a franchisor; in fact, it is precisely the opposite: the franchisee chooses and agrees to adopt the standards that a franchisor creates for the brand at the outset of the franchise relationship by entering into a mutually agreed-upon contractual relationship. The notion that franchisees are “squeezed” by franchisors and forced into so-called “take it or leave it contracts,” as some policymakers have alleged, represents a fundamental flawed understanding of the franchise business model and the free-market system itself. Of course, every business must develop and operate under certain criteria (for example, what time of the day should I open, what items I sell, what quality of products should I offer, where should I buy those items, how should I market my businesses, what prices should I charge, etc.). [vi]
Rather, the businessperson decides that instead of operating independently – and developing and adopting its own standards – she or he chooses to sign a franchise agreement and join a franchise system precisely in order to make use of that system’s already developed standards. Prospective franchisees take that path because they understand that in order to take advantage of the benefits of being a franchisee, they must accept that the limitations inherent in being part of a system rather than operating on their own. In franchising, you go into business for yourself, but not by yourself. Indeed, they become franchisees knowing that the limitations serve a valuable propose. For example, not only do the standards help the franchisee develop her or his business, but they also help to preserve the value of those businesses. Undeniably, a wayward franchisee will likely be encouraged to comply with the brand standards for the benefit of all stakeholders – certainly including the “wayward franchisee,” but also the franchisor and the other franchisees in the system who have invested in the brand’s value. An example of the proposition that standards benefit all the franchisees in the system was cited by the Massachusetts Supreme Judicial Court when it confirmed that a franchisor’s post-term covenant against competition was reasonable and enforceable because “Dunkin’ Donuts was protecting the very franchise system from which the plaintiff himself benefited.” Boulanger v. Dunkin’ Donuts Inc., 442 Mass. 635, 636 (2004). [vii]
The Value of Franchising. Oxford Economics (2021). The FTC Franchise Rule
The IFA strongly supports the FTC Franchise Rule (16 C.F.R. Part 436) as well as federal and state efforts to enforce the existing laws. The IFA – along with many franchisors and respected professionals working in the franchise sector – submitted comments to the FTC in 2019 in response to the Commission’s request for comments (84 Fed. Reg. 9051 (2019)) on whether the Franchise Rule should be retained. IFA’s detailed comment noted its robust endorsement of the Commission’s retention of the Franchise Rule.
Indeed, the IFA firmly believes that the inherent benefit of useful disclosure and its value to commerce is one of the guiding principles of the American economy. Justice Louis Brandeis famously observed over a century ago that “[s]unlight is said to be the best of disinfectants.” Louis Brandeis, Other People’s Money and How the Bankers Use It 62 (1914) (quoted in Statharos v. New York City Taxi & Limousine Comm’n, 198 F.3d 317, 323 (2d Cir. 1999)). [viii]
In considering antitrust issues, the Supreme Court recognized that pre-transaction disclosure of critical life-cycle cost information was invaluable to parties assessing whether to buy the underlying product. Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 473 (1992). [ix]
The existing Franchise Rule sets up a disclosure regime that has served its fundamental regulatory purpose: to provide significant and important pre-sale disclosure to prospective franchisees. These well-developed disclosure requirements benefit not only prospective franchisees, but they also provide the basis for an across-the-board industry standard that all franchisors must meet. Disclosure requirements that apply uniformly across the country allow prospective franchisees to compare different franchisors’ offerings and obtain details needed to avoid franchisors that don’t suit the prospective franchisee’s needs, standards, and other requirements. The disclosure also levels the playing field among franchisors so that all are evaluated by prospective franchisees on the basis of roughly the same set of information. [x]
Moreover, the Franchise Rule has become the international gold standard for pre-sale franchise disclosure. Since the Franchise Rule took effect in 1979, dozens of other countries adopted similar requirements, recognizing that pre-sale disclosure similar to that required under the Franchise Rule is needed to protect prospective franchisees and to preserve the integrity of franchisors’ offerings. State franchise pre-sale registration and disclosure laws, which apply in 14 states, largely parallel the disclosure requirements of the FTC Franchise Rule. [xi]
These laws also require franchisors to file applications with state regulators to obtain approval before offering franchises in those states. Those state filings are made initially (that is, before the first time the franchisor offers franchises in that state), annually after that (that is, to renew the IFA Submission to the Senate Committee on Small Business and Entrepreneurship March 16, 2022 Page 5 initial filing in that state), and in the interim (e.g., if there are material changes to the information in the FDD). The quality of the U.S. disclosure regime has enabled the growth of legitimate franchised business not only in this country but internationally as well. U.S. franchisors are highly regarded internationally, and many are sought-after for business development abroad. The fact that the U.S. is a stable and professional environment for franchising is derived, in no small measure, from the professionalism that is required in order to comply with the disclosure obligations under the Franchise Rule. From IFA’s perspective, effective, efficient, and smart law enforcement is necessary to the proper functioning of the disclosure regime and consistent with the goal of making the franchise model more secure, more valuable, and even more beneficial for franchisees and franchisors alike. [xii]
Encouraging compliance – and where appropriate – penalizing material non-compliance – serves the businesses that are already in franchising. Moreover, a solid and reliable market also serves the needs of the growing number of businesses that seek to adopt this model to efficiently bring their goods and services to the market. State franchise regulators have a heavy burden due to the growing number of filings by franchisors, limited resources available to the regulatory offices, and the effects of the pandemic.
In the case of BurgerIm, state regulators approved the franchisor’s FDD even though there were “flashing red lights” as described above. Indeed, many parties (as noted above, these include bankers, lawyers, auditors, and others) also apparently missed those warning signs (although it is impossible to know or quantify how many prospective franchisees saw and heeded those caution flags). [xiii]
For our own part, we at IFA can also do better – we highlight the accomplishment of fast-growing franchisors and need to redouble our efforts to venerate the franchisors that perform at the highest levels. SBA and Franchising. As noted above, the IFA strongly supports the FTC Franchise Rule, and we believe in the disclosure promoted by the Rule. Even as we embrace the inherent value of disclosure, we do not believe that the proposal to require disclosure of SBA loan default rates would have prevented or remedied the problems in the “BurgerIm” system.
Additionally, creating new mandates specifically directed only to franchised businesses – while excluding other types of businesses – unfairly disadvantages a particular business model – especially when the data does not show that franchised businesses experience any discrepancy in SBA charge-offs. [xiv]
In fact, requiring SBA loan default rate disclosure (leaving aside our doubts as to its value, how dependable would be the underlying data available to franchisors, and our concerns over other aspects of the proposed legislation) would add another data point to the FDD for franchisees to consider. [xv] Notably, the BurgerIm FDD already included more than enough data – the “flashing red lights” referred to earlier – to have alarmed and alerted most prospective franchisees, their advisors, and their bankers as well as state regulators. And yet – despite that clear and clarion disclosure – many parties green lit and even signed on to the BurgerIm franchise arrangements. Our view is that requiring a special kind of disclosure – for franchisors only – that would add additional data to the FDD would not be useful to prospective franchisees or serve a beneficial purpose. [xvi]
Furthermore, the appropriate forum to consider changes to franchisor disclosure requirements rests with the Federal Trade Commission, not with the Small Business Administration. [xvii]
Thank you for the opportunity to share our views with the Committee and for considering the points that we have raised. We would welcome the opportunity to answer any questions that the Senators and their staff may have.
We also note there are inherent limitations in the reliability and completeness of the data available to franchisors on default rates for SBA-backed bank loans. In order to compile that information, numerous parties would have to provide various pieces of the data puzzle in order to form a complete picture, let alone prepare a reliable and statistically meaningful disclosure. The cost of gathering this data and preparing such disclosure would be far greater than simply downloading an Excel spreadsheet from a network and publishing it in Item 19 of a franchisor’s FDD [xviii]
End – Submitted statement by Matthew Haller, C.E.O. and President of the International Franchise Association (IFA) and IFA attorneys.
Our review – There is so much to “unpack” here in this divisive, seemingly anti-Franchisee, misdirected effort to distract that it rivals the magician’s sleight of hand. I’ll do my best without the benefit of a cadre of attorneys.
[i] In typical IFA speak, they “initially” take no position concerning either S.1120 or S. 2162 – The first of the multiple attempts to distract from the proposed legislation.
[ii] Don’t focus on the proposed legislation; rather, let’s consider the “underpinning” of it.
[iii] The IFA applauds the work of law enforcement agencies but doesn’t want to consistently support efforts to surface fraud, abuse, and franchise falsehoods within the membership of their very own organization.
[iv] Perhaps the IFA is correct in their belief that the proposed legislation would not have stopped this franchise “misfortune” when it occurred. The belief, however, begs the question, “what about now?” What about the current franchise space “misfortunes”? How about the future? Is the organization prepared to put safeguards for the people they purport to represent in the franchise space? Would they not, by their lobbying, research, money, and authority, assist the righteous franchisors and prospective Franchisees by not resisting the proposed legislation presented today for, in part, that very purpose?
[v] Interesting that “Flashing Red Lights” should have been noticed by everyone else but the IFA, who promotes, encourages and often stands behind franchisors who have paid up and yet may be responsible in the same way that “Burgerim” was. Or do they not believe that history repeats itself? Should not the IFA formulate, with its money, authority, and lobbying efforts methods to prevent repeats of precisely this? Does mentioning “Burgerim” as the example of bad franchising preclude them from doing anything about possible assisting in fixing the governance of the entire franchising space? They claim to work for all of franchising; would that not include existing and prospective Franchisees?
[vi] On the contrary, the franchisor absolutely imposes the standards by which a Franchisee is to operate. To say otherwise IS a misinterpretation of the business model. These franchise agreements are adhesion agreements where Franchisees are fully expected to adhere to the agreements they sign. This is universally understood and should be considered and researched by anyone entering into a franchise agreement. The terms and conditions of today’s franchise agreement “templates” are absolutely one-sided in favor of the franchisor. Some will say rightfully so, and they wouldn’t necessarily be wrong; however, certain elements of the franchise agreements could be modified to represent “fair and equitable” treatment inclusive of “Total Quality Franchising.” Far too many to mention here and again, just another attempt to divert from the issue before the committee. And yet the IFA continues to attempt to divert and distract from the very reason they’ve come before the committee.
[vii] Here, we see another blatant attempt at a total diversion from the issues brought before the committee. If the committee doesn’t understand the precepts of the franchising model, which requires a further explanation from the International Franchise Association, then the prospective Franchisees, governed by rules enacted, are worse off than the IFA would have anyone believe.
[viii] There are those of us who wholeheartedly agree with Justice Louis Brandeis in the cited observation the IFA quotes where Justice Brandeis observes that “[s]unlight is said to be the best of disinfectants.”. We would add that transparency also shines as bright and as cleansing as the sunlight of which he spoke. That was the very purpose of this committee hearing and the proposed legislation by Senator Cortez Masto. To portray otherwise in an effort to misdirect is to create a chasm between the simple reality of these bills and the bizarre rejection of the same.
[ix] Here also, the IFA quotes the Supreme Court, which, considering antitrust issues, recognized that pre-transaction disclosure of critical life-cycle cost information was invaluable to parties assessing whether to buy the underlying product. Now, admittedly, I’m no lawyer, nor do I pretend to be; however, if this statement alone doesn’t approve of the very simple, very elegant, and very concise proposals set before this committee, then I don’t know what else might. “pre-transaction disclosure.” “…invaluable to parties assessing whether to buy the underlying product”.
[x] How does this comment in the IFA submitted statement truly set up a level playing field when the proposed legislation’s key and critical components are not included? If these recommendations were to be implemented considering the additional information a Prospective Franchisee might have in, as mentioned in the IFA statement, “Disclosure requirements that apply uniformly across the country allow prospective franchisees to compare different franchisors’ offerings and obtain details needed to avoid franchisors that don’t suit the prospective franchisee’s needs, standards, and other requirements.” The statement simply doesn’t square with the proposed legislation. There are only several reasons for not providing the transparency proposed in the legislation. 1) Because the franchisor doesn’t have it. 2) Because the franchisor doesn’t understand it. 3) Because the franchisor wishes to hide it.
[xi] The franchise rule, effective in 1979, is now forty-three years old. While we agree not to fix that which isn’t broken, not to revisit portions of the rule to update and make fairer, the elements of disclosure would be pure folly and indicative of the absolute resistance by those who have found every conceivable loophole in the rule. No one has suggested that the rule be “thrown out,” but to deny its time to be reviewed, enhanced, and brought up to speed with a franchise space that has far outpaced its original intent is to be so stuck on the status quo for all the wrong reasons. Again, the FTC Rule was not even the issue brought before the committee, and yet here it is again fulfilling the adage “throw enough against the wall in the hope that some sticks.” A slight yet beneficial addition or amplification of a requirement, yes. A wholesale “change,” no.
[xii] The IFA also has a role to play in their perspective concerning effective, efficient, and smart law enforcement necessary to the proper functioning of the disclosure regime and consistent with the goal of making the franchise model more secure, more valuable, and even more beneficial for franchisees and franchisors alike. So why not join Federal, State, and Local Legislatures in assisting in crafting meaningful and substantive proposals that assist “smart” governing and enforcement authorities in doing their jobs? Why block them at every possible turn when proposals are brought forth, as they have been during this committee hearing, in ways that make the IFA appear to be so insistent on not helping to create fair and equitable change that it simply boggles the mind.
[xiii] And clearly, the International Franchise Association can say the same, whose resources and affiliations are plentiful. Utilize the same or better organizations it has to prepare its glowing franchise annuals to research the issues plaguing our franchise space. FRANdata, who you use, does fairly extensive research and can provide you with data sets that would assist in the removal of the “bad actors” that cast blight on the franchise space.
[xiv] A comment made by an associate wondered as follows relative to this part of the IFA statement. “Additionally, creating new mandates specifically directed only to franchised businesses – while excluding other types of businesses – unfairly disadvantages a particular business model – especially when the data does not show that franchised businesses experience any discrepancy in SBA charge-offs.” The inherent problem with this statement is that a FRANCHISEE has paid a significant investment into a franchise. The franchisee invested that money because the franchisee believed the investment into the franchisor was sound. If the FRANCHISEE had known of a series of charge-offs for unpaid and defaulted SBA loans or otherwise, they may have given pause to the decision to move forward. There is a discrepancy if for that reason alone.
[xv] Had I not read this, I would not have believed it was part of the IFA statement. “In fact, requiring SBA loan default rate disclosure (leaving aside our doubts as to its value, how dependable would be the underlying data available to franchisors, and our concerns over other aspects of the proposed legislation) would add another data point to the FDD for franchisees to consider. It seems an awful lot like the suppression of information that would be very much in favor of a Prospective Franchisee conducting due diligence. Who in the name of practical business wrote this nonsense?
[xvi] And, to add insult to injury, went on to write this! “Our view is that requiring a special kind of disclosure – for franchisors only – that would add additional data to the FDD would not be useful to prospective franchisees or serve a particularly useful purpose.” If you find out who they were, please provide immediate disciplinary action and retraining on the very purpose of your existence as an organization.
[xvii] While true that the SBA can implement the changes proposed today without legislation, the IFA is very much aware that the Federal Trade Commission under the leadership of Lina Khan is taking a very serious progressive look at the franchising space and is likely fully supportive of the efforts by Senators Cortez Masto and Congresswoman Jan Schakowsky in their efforts to enhance the franchise space and governance and beyond. The opportunity for transformational change has never been greater.
[xviii] Here, in the closing statement provided by Matthew Haller and the IFA lawyers, we see a last and painful effort to make their point by implying that reliance on the validity of the data, the cost, and the effort in modifying these two aspects of disclosure will be significantly difficult. We say take the combined losses of those bankrupted by fraudulent franchisors, scheming franchise sales individuals, and the constant barrage of false and misleading media, advertising, and public relations, all of what the IFA says becomes minuscule by comparison.
In summary, the International Franchise Association and its heavily talking point-loaded and lopsided panel sought to divert the attention of the matters at hand and those before the committee. Witnesses remarked on the Pro-Act, the Fast-Act legislation initiatives, which had absolutely nothing to do with this hearing or its proposed content.
End – IFA Statement Submission Review
Submitted statement by Robert W. Emerson, Huber Hurst Professor of Business Law, Warrington College of Business University of Florida
In the interest of full disclosure and transparency, I will include the entire statement Of Mr. Emerson by link.
I believe that Mr. Emerson presented a clear, concise, and un-influenced opinion on the proposals with a great degree of integrity and honest dialogue. He had little to gain by his testimony, nor was it acrimonious. But, by far, it was the most comprehensive, all-encompassing, and most compelling piece of testimony provided to the committee.
I implore you to read the testimony in full and come to your own conclusions about its accuracy or content.
On behalf of himself
I have elected to include the following statements and testimony, without excessive narratives, to let the testimonies speak for themselves.
It should be noted that Mr. Yelowitz indicates that although preliminary, the difference in charge-offs between franchisees and independent businesses is statistically insignificant for the 7(a) loan program
Testimony of: Aaron Yelowitz Professor of Economics, University of Kentucky Senior Fellow, Cato Institute
On behalf of the IFA
It should be noted that Ms. Stapg is a strong advocate for the IFA as well as favoring the SBA 7(a) loan program
Leanne Stapg C.O.O. and Multi-Unit Franchise Owner of The Cleaning Authority, Columbia, Maryland
On behalf of the IFA
It should be noted that Mr. Tipton advocated for the elimination of SBA 7(a) loans
Testimony of Bryan Tipton Owner, Tipton Investments
On behalf of the IFA
In his questioning, Senator Rand advocated for the elimination of SBA 7(a) loans and that generally, the government should get out of the way of governing the franchise space.
Additionally, several witnesses and those questioning brought up a myriad of franchise-related issues that had nothing to do with the session or its intended purpose. It appeared that although the bills are relatively small, it appeared they might not have been read by members of the committee present who did some questioning.
Our thanks to the committee, its members, those present, staff, and IFA representatives for attending the hearing.
A special thanks to the Honorable Senator Cortez Masto for her initiative and Committee Chair the Honorable Senator Ben Cardin and Ranking Member the Honorable Senator Rand Paul for conducting the hearing.
A copy of the entire archived session and hearing video is available here.