From the Chair of the International Franchise Association, Mr. David Humphrey
With comments by Kim Perrotta
Government Is Coming After Franchises: Here’s Why That’s a Bad Idea
Published 08/15/23 08:00 AM ET | Updated 08/15/23 08:18 AM ET
Author David Humphrey – As printed in “The Messenger”
“Lawmakers and federal agencies unfamiliar with our franchise model will hurt all of franchising. But if these policymakers take the time to understand how the system works, I’m confident they will stop viewing franchising as a target and start viewing it as what it is: a bright spot in our economy that deserves to be protected.”
KGP: – Let’s begin with my comments which shall be marked bold throughout the article. First and foremost, it is entirely audacious to refer to franchising as “our franchise model” as it is not. The franchise model, as governed by regulators in America, belongs to the people of the United States and not a trade organization. Next, franchising is not a target but rather a quasi-disciplined approach that absolutely requires an update, a tweak here and there, and fairness for potential Franchisee Investors. As for understanding the franchise model, you can rest assured that regulators and policymakers who are determining whether or not the “rule” requires adjustments and modifications have done the due diligence necessary, have requested opinions and information, have had open forums for discussion, have been advised by legal and other governing authorities, and very many who know franchising far better than most. As witnessed by the recent requests for information by the FTC, both Franchisees and franchisors, along with lawyers, consultants, and suppliers, had the opportunity to express their opinions and did so.
Government regulators have a new favorite target, and their proposals have far-reaching implications for our economy and our daily lives.
KGP: – Favorite Target? Hardly. “Government Regulators” are the same authorities that protect, enhance, and promote franchises and numerous other business types in many business fields. If not for this protection and concern, you wouldn’t have the guidelines that allowed the author and others to become successful franchisees (or, in the case of the author, investor) to begin with.
Demeaning and criticizing these government entities will not do anything for trade organizations and others of that ilk in attempting to portray them as intrusive and unknowledgeable. It does nothing to advance this misdirected cause. In fact, I’d venture to say they know far more about the law, the rule, and the need for transformational change than most associated with trade associations.
Federal agencies from the Federal Trade Commission to the National Labor Relations Board are considering sweeping rule changes that single out franchise establishments, disadvantaging them against other businesses. Senate Democrats continue to push the anti-franchising PRO Act and other anti-franchise ideas. California’s legislature is considering a joint employer bill that would spell death for many franchises, and they’re inspiring other states to follow suit. Now California’s former chief labor regulator, who helped incubate many of these ideas, is the Biden administration’s nominee for Secretary of Labor.
KGP: – As for the “Pro-Act,” I have maintained a “moderate” position and agree with the statement made by my colleagues with the American Association of Franchisees and Dealers as indicated, noting that the bill has not been codified while being re-introduced in 2003 as “H.R.20 – Richard L. Trumka Protecting the Right to Organize Act of 2023.
AAFD Advances Legislative Influence in Congress
The AAFD is pleased to forward two comment letters issued this past week by AAFD Chairman, Robert Purvin and the AAFD’s Director of Public Affairs and Engagement, Keith Miller:
- The AAFD has expressed formal support of new bipartisan legislation introduced in Vermont to protect franchisee rights in a manner similar the California law passed in 2015. The AAFD has been at the forefront of promoting this legislation and are pleased to attach our support letter as well as a link to the bill as introduced in the Vermont legislature.
- The AAFD has sent a comment letter to the US House of Representatives supporting a Joint Employer finding when a franchisor excerpts undue control over a franchisee’s business ownership. The AAFD sent a similar comment letter to the National Labor Relations Board last year when the NLRB was evaluating its existing Obama era Joint Employer Rule. Congress is currently debating HR 2474, called the PRO Act which, in part, would adopt a pro-franchisee joint employer standard. The PRO Act is a pro labor bill, which is largely controversial for franchisees, and the AAFD has not commented regarding the labor relations aspects of the bill. But franchisees should take note: The AAFD has commented in support of a portion of the bill that would codify joint employer status on a franchisor that unduly erodes a franchisee’s equity ownership of the franchised business. This is consistent with keeping discussions open on issues that impact franchisee equity and control, and we will continue to push to further those discussions.
This anti-franchising crusade could impact every community and nearly every industry. Far more than just fast-food restaurants, franchises include hotels, gyms, daycares, plumbing companies, real estate businesses, and more, totaling nearly 800,000 establishments that account for 3% of U.S. GDP.
KGP: – Whether correct or not on the Frandata percentage, we couldn’t agree more that an appropriately governed franchise “model” is as important as any business space regulated, monitored, and modified as necessary in the interest of consumers and investors within these United States. It is not an “anti-franchising” crusade, as, once again, the author and others say. Still, they should be reminded that the current franchise “rule” substantially decreased the number of fraudulent charlatans who entered the franchise space with only one desire: to fleece deliberately uninformed and misinformed Franchisees of their hard-earned savings and investment dollars. Time and time again, we still see countless franchisors who have not learned the lesson of being ethical and mindful of the businesses they attempt to build on the backs of the very Franchisee investors who consistently are failed to be mentioned.
Trade organizations refer to these incredible failures while decimating the lives of Cherished Franchisees as “one-offs,” anomalies, and “isolated incidences” when the abuse in franchising is far more rampant than they’d have the public, and franchisee investors, believe. Even worse, these same organizations call Franchisee comments and requests for information as being “Anecdotal.”
Many of the rules in question stem from a fundamental misunderstanding of franchising. Policymakers see franchisees (the local owners) as victims of franchisors (the parent brands). But as someone with experience as both a franchisor and a franchisee, I know that the two sides rise or fall together. There is no sustainable business if the franchisor succeeds and the Franchisee fails, or vice versa.
KGP: – While the attempt here is to, once again, demean and declare that “policymakers” fundamentally misunderstand franchising as nothing less than an insult to them and the constituents they represent. Moreover, it is believed this is a “partisan” issue based on the comments in this article and trade organization talking points that are partisan as witnessed by their contributions and “political action committees” who lean in one biased direction with few exceptions. If this were the case, you would not have the satisfactory and comprehensive report by the honorable Senator Cortez-Masto or the legislative effort of the Honorable Congresswoman Jan Schakowsky.
Here you’ll find a summary of proposed legislation by one of the leading sources of franchise information and analysis:
Opinions are much like noses; everyone has one. Again, the constant repetition of trade organization talking points and disparaging comments relative to policymakers don’t advance the cause. In fact, it does precisely the opposite.
Franchisors need the freedom to act in the best interest of their entire systems, including their franchisees, by making and enforcing decisions that benefit the brand. For example, you might recall the burst of interest in chicken sandwiches at fast food chains after the Popeyes’ chicken sandwich went viral in 2019. This chicken craze was impacting burger sales at McDonald’s, so they rushed to introduce the McCrispy.
KGP: – Let’s spin this portion of the article by indicating that it is Cherished Franchisees that need certain freedoms when investing hard-earned dollars into a franchise, such as these listed here by the American Association of Franchisees and Dealers – https://www.aafd.org :
Suppose the FTC had its way and prevented McDonald’s from making “unilateral changes in their operating manual” or requiring “mandatory capital investments,” as the regulators are now proposing. Some franchisees would have balked at spending the money to install new machinery to make the chicken sandwiches, resulting in some locations offering the sandwich and others not. The consumer would no longer see McDonald’s as a nationwide brand offering consistent products and services.
KGP: – A simple fact and one that is consistently avoided. “Operations Manuals” are nothing less than extensions of the franchise contract and agreement but are not treated as such. Because the information contained in the majority, if not all, operations manuals is considered proprietary, Franchisee Investors do not get to see the contents of these contract extensions until and only after they sign franchise agreements. Since we’re “supposing,” why not consider fully exposing the operations manual contract extension and its impact on decisions that impact the Potential Franchisee Investor and, perhaps, how it has been used to modify contract terms in the past?
Better still would be an independent Franchisee Operated and controlled Franchisee Association that would require, for example, a two-thirds majority of all Franchisees in a system to approve any changes made via the operating manual extension of the franchise agreement contract.
Last, not all franchisors’ decisions are thought out properly and based on definitive results after testing. A novel idea might be for the franchisor to extensively test any operations manual contract modification while demonstrating a solid return on investment for its Franchisees. Again, better still, since the franchisor makes its money on the top line rather than a Franchisees profit, how about they foot the bill for the example cited in this article and pay for the equipment from the royalties they collect? Perhaps royalty relief covering the costs they seek to impose would be in order. We know this would be entirely ethical and proper, which may very well make it unworkable for most.
That’s incredibly damaging for franchisor and Franchisee alike. It means that the majority of McDonald’s franchisees who follow the rules and make the necessary investments would see their businesses devalued.
KGP: – Unfortunately, the contract extension known as the “Operations Manual” can do far more damage to Cherished Franchisees than choosing to sell or not sell a sandwich. These hidden extensions of the franchise contract will often include the franchisor’s ability to make almost ANY change they wish to make relative to the operations of their business concept. An example of that sort of language that “extends” the franchise contract only AFTER a franchise agreement is executed is factually provided here:
*We can and expect to modify our standards and specifications as we deem necessary. We will notify you in the Operations Manual or otherwise in writing (such as via e-mail) of any changes in our standards and specifications.
*Confidential Operations Manual: You must operate the Franchise following the standards and procedures specified in the Operations Manual.
*We may revise the contents of the Operations Manual, and you must comply with each new or changed standard. You must also ensure that the Operations Manual is kept current at all times.
*If there is a dispute regarding the contents of the Operations Manual, the terms of the master copy maintained by us at our home office will be controlling.
*You must comply with Operations Manual as amended.
Recently testifying at the FTC’s July 20 open hearing, I reiterated that one-size-fits-all rules across dozens of industry verticals and thousands of franchise companies are unlikely to end well for the franchisees they’re trying to protect. I also drove home the point that decisions made around labor and employment at my franchises are just that: mine and mine alone. It is true that there have been isolated incidents of bad actors on both sides. The franchising model has its tradeoffs, and regulations should be enforced aggressively when either franchisors or franchisees break laws.
KGP: – By far, and under the current FTC leadership, this is the most active FTC in my lifetime. They are addressing many issues and concerns, all in the interest of protecting consumers and regulating disparities by the unfair practices of specific businesses and industries. The FTC is NOT targeting franchising as the author would have you believe but instead seeks to enhance and provide for levels of fairness generally relative to franchising. Why would anyone oppose a “Franchisee Bill of Rights”? that makes common sense to every franchise investor, whether large or small? It defies logic.
Aside from the FTC open hearing indicated in this article, here’s another where various opinions were rendered directly to Madam Chair Lena Khan of the FTC with direct relevance to franchising:
It’s not so fast on “Isolated incidents,” which have literally ruined the lives of individuals and families who, without enhanced regulation, fell victim to franchisors who care only about top-line earnings and royalty revenue. It isn’t suggested that ALL franchisors think this way, and if so, franchising wouldn’t thrive as a perfectly viable method of doing business.
What IS presented is that the regulation becomes enhanced so that Cherished Franchisees are treated with fairness, equality, and certain rights (such as the AAFD “Bill of Franchise Rights” promulgated in 1996, which are potent statements of fairness that have held up since first published.
Were it not for Labor Laws and the fair treatment of those employed, you’d have egregious and consistent abuse of those same employees without some semblance of governance. “Decisions made around labor and employment” are not yours and yours alone, as the author would have you believe. Consider items such as overtime pay, compensation for earned time off, labor law relative to age, ethnicity, gender, sexual orientation, sick leave, holiday pay, and the list goes on—clearly, not the authors’ “mine and mine alone” point he attempted to drive home.
However, disputes within a franchise system are rarely black-and-white, nor are franchisees always the “victims.” For instance, sometimes, bad franchisees resist spending the money it costs to periodically renew their stores. As a result, old and tired stores drag down the public perception of the entire chain. If we unduly restrict franchisors, they won’t be able to protect the brand. If a franchisor’s requests seem unreasonable to a large number of its franchisees (not just a few holdouts) they have ways to push back through franchisee associations, the courts, and the court of public opinion. No franchisor can afford to upset many of its franchisees for long.
Updates and remodels to certain concepts are critically important. The issue, however, is not so much the updating or remodeling but the costs associated and whether or not these “periodic renews” provide for profitable returns on investment by the Franchisee. It is up to the franchisor to test, retest, and test again the viability of a “renew” and demonstrate that it would have the ability to increase profits and sales for the Franchisee. Every new employee of the franchisor involved in design and development has their ideas on “upgrading,” whether it be décor, equipment, signage, logos, or vehicle wraps. It, of course, isn’t their money they’re spending but that of the Franchisee.
Add the fact that changes “mandated” often always include purchases from approved sources only, eliminating the possibility of competitive bidding to accomplish the same result. Last, the hidden extensions of the franchise agreement, known as the Operations Manual, may require these renews, modifications, or changes at will and when the franchisor decides to impose the expense.
Regulators are seeking to fix a system that isn’t broken. Economic output by franchises is thriving in the midst of challenging economic times. Growing at 3%, total franchise employment is forecasted to reach 8.7 million this year. On top of that, Franchise Business Review finds that franchisee satisfaction is at an all-time high, and that 82% of franchisees support their brand’s corporate leadership.
KGP: – Ask a bankrupted Franchisee or one who has incurred hundreds of thousands of dollars attempting to defend themselves against unscrupulous and deceptive franchisors if the system is broken or not. Ask the multitudes of Franchisees that have filed class action suits consisting of the same system complaints if the system is broken or not. Ask the Franchisees who have been subject to retaliation for speaking up if the system is broken or not. This comment isn’t to suggest that it is “broken,” but the time has come to review the current rule, which has not been modified since 2007. The world and business have changed. Like all things that must represent the time in which we live, so too does the franchise rule. It must serve to protect, enhance, and promote a fair and equitable method for doing business successfully, fairly, and even handily.
This success proves the symbiosis that exists between franchisor and Franchisee. When the franchisor is profitable, the whole system benefits, because there’s money for innovation and marketing. And when the Franchisee is adequately profitable, the whole system benefits, because revenues rise and new units open. This is why regulators should be neither pro-franchisor nor pro-franchisee, but rather pro-franchising.
KGP: – I couldn’t agree more with the above statement by the author, which is why it’s so important not to have these issues become partisan as they are not, although implied as if they are.
Franchisees are not defenseless prey — we are entrepreneurs and pillars of our communities. We continually engage with our franchisor to improve our franchise system. Lawmakers and federal agencies unfamiliar with our franchise model will hurt all of franchising. But if these policymakers take the time to understand how the system works, I’m confident they will stop viewing franchising as a target and start viewing it as what it is: a bright spot in our economy that deserves to be protected.
KGP: – Author Humphrey speaks for himself and not the “we” all in the space as indicated above. We agree, however, that Franchisees are pillars of the community, do much for the economy in the franchise space, and seek to become successful, profitable, and servants to their communities while being treated fairly by their franchisors who are ideally committed to supporting and defending them.
In summary it should be noted that I am a strong proponent of franchising, have earned my living within the space for nearly four decades, and am mindful of the many successes in franchising and its impact on economy. I am also incredibly mindful of the Franchisees who are all in, devote themselves to their vision and dreams of success and am dedicated to them as I am those who have been deceived, misled, and gone bankrupt when having engaged the wrong franchisor.
To believe otherwise would be a mistake. There are differing opinions that can and should be discussed civilly and with appropriate succinct discourse inclusive of factual information.
In a comment by AAFD’s Trustees to the recent request for information it was written:
“The commission is asking the overriding question, “Is Franchising Fair”? The simple and overarching answer is that the franchise relationship is governed by contracts that, for good and proper reasons, extend significant power to franchisors, and as such the potential for abuse and profiteering is huge”.
The full RFI from the AAFD can be located here:
Franchises Cherished Franchisees are “a bright spot in our economy and deserve to be protected.”
David Humphrey is a Planet Fitness franchisee based in Connecticut who owns gyms all over the country. He is also chairman of the board of the International Franchise Association. More of David’s background can be found at https://www.franchise.org/our-team/executive/david-humphrey
Kim Perrotta is a Franchisee Advocate, Broker, Supporting Member, and Delegate to the American Association of Franchisees and Dealers leadership council. More of Kim’s background can be found at https://www.worldwisefranchise.com.