International Franchise Association Outlines Core Practices and Suggests Changes to FDDs and Regulations
The International Franchise Association has published a report in support of responsible franchising practices and lists core practices for doing so. The report, “Responsible Franchising: Policy Recommendations to Strengthen the Franchise Model,” is a call to action for franchisors, franchisees and suppliers to operate transparently during the sales process and for policymakers to follow the report’s suggestion in regulating franchise presales processes. The IFA report states that transparency and adherence to high standards during the sales process will protect the franchise business model and its owners, workers and customers.
The sale of franchises in the United States is robust. There were about 790,500 franchise units operating in the nation in 2022, according to Statista.com, but last year the number had swelled to 806,270. In its 2024 Franchising Economic Outlook document, the IFA predicted that franchising would end this year with about 821,000 total units in the United States.
Federal Franchise Rule Under Review
The Responsible Franchising report points out that sales of U.S. franchises are governed by the Franchise Rule, a federal regulation enforced by the Federal Trade Commission that requires a franchisor to disclose leadership details, its financial status and legal entanglements to potential investors. The FTC currently is reviewing the Franchise Rule, and IFA is working with its franchisor, franchisee and supplier members to come up with recommended improvements to the rule.
Key to every franchise sale is the Franchise Disclosure Document, or FDD. The Responsible Franchising report cites research determining “that the length and complexity of the language used in the document can be a barrier to some first-time business owners.” Seeing the need for greater clarity in the document and in the overall sales process, the IFA assembled working groups made up of franchisors, franchisees and suppliers (including franchise lawyers, consultants and third-party franchise sellers) to develop the following core practices vital to equitable, effect franchise sales and operations:
- Clearly establish expectations and objectives before the sale to get franchisors and franchisees in sync about their long-term relationship.
- Conduct due diligence throughout the sales process so the franchisee matches up with the right brand opportunity.
- Ensure that franchisors and franchisees are fully committed to their obligations as a way to protect the brand and the franchisee’s equity.
- Focus on profitability and unit economics to benefit franchisees and franchisors.
- When altering standards in response to demand shifts by consumers, facilitate franchisor-franchisee collaboration via effective communication.
Recommendations for Policymakers
The report also has recommendations for state lawmakers and the FTC as overseers of the franchise presale process in regard to franchisees, franchisors and suppliers. Near the end of the report, the IFA encourages policymakers – the FTC and state lawmakers – to support the report’s recommendations and goals for responsible franchising. Below is a summary of those recommendations for regulations, laws and rules that affect franchising.
First, regulations should state the responsibilities of the prospective franchisees. Those responsibilities start with a detailed, complete understanding of their obligations before they invest, with advice from a competent lawyer recommended. Prospective franchisees are required to carry out due diligence including brand comparisons, interviews with current brand franchisees, and in-depth knowledge of their full financial obligations.
Second, franchisors should produce reader-friendly FDDs so that every prospective franchisee can make a well-informed investment decision. “IFA believes franchisors can present the information… in a more comprehensible manner,” the report states. To that end, the Responsible Franchising report lays out concrete suggestions to:
- Use a conversational, question-and-answer format in the FDD.
- Provide an executive summary that eases “apples-to-apples comparison of franchise opportunities within an industry.”
- Restructure sections that contain hard-to-digest tables. Instead of those tables, the FDD should present the information with examples and explanations in sentences.
- Improve the content regarding the initial investment and the financial performance and health of the franchise. The report specifically calls out Items 7, 19, 20 and 21 of FDDs as requiring clear, easy-to-understand information.
- Modernize the FDD so that it can incorporate multimedia.
The report also recommends that suppliers make disclosures. Those should include their recent professional experience, litigation history, services performed for franchisors and what they were paid, industries represented and the number of brands within each industry, franchisees who closed sales during the previous year, and standardized information about third-party franchise sellers as well as questions prospective franchisees should ask their third-party sellers.
IFA Principles Underscored
The report reiterates the IFA’s Statement of Guiding Principles, which reads as follows: “Improved pre-investment disclosure will benefit both prospective franchisees and franchisors by enhancing the competition among franchisors for qualified franchisee candidates. By clearly communicating the terms contained in a franchise offering, prospective franchisees will be better able to evaluate and make investment choices among the wide range of franchise opportunities available to them and to choose from those that meet their goals, ambitions, financial and other requirements.” The full Responsible Franchising report is available here.
