The Federal Trade Commission yesterday issued new disclosure rules designed to protect people who invest in franchises from fraud.
The new regulation will require franchisers, like McDonalds, Holiday Inn, Dunkin' Donuts and many others to make specific business disclosures to consumers seeking to purchase franchises in their operations.
"Far too many consumers have invested their life savings in business ventures about which they had very little solid information," said Albert Kramer, director of the FTC's Bureau of Consumer Protection.
"This rule," he added, "will provied would-be investors with the factual information they need to make an informed investment decision. Futhermore it will provide potential investors with a means of verifying claims made by the franchiser's ales personnel."
Scheduled to go into effect on July 21, the rules call for civil penalties of up to $10,000 per violation for franchisors who lie to potential investors.
An industry that is only about 20 years old, franchising today accounts for an estimated $240 billion in sales, according to industry estimates.
The new disclosure rules would require franchisors to disclose to potential investors the business experience, litigation and bankruptcy history as well as the general financial background of the franchisor and its key management personnel.
In addition, the franchisor will be required to disclose statistical information on the number of investors and company-owned outlets, the number that have been terminated during the past year, and the reasons for their termination.
Provisions for termination, cancellation and renewal of the ranchise agreement will have to be detailed, as well as any restrictions imposed by the franchisor on the manner in which the franchisee operates his business.
Such restrictions would include the type of goods to be bought and sold, what suppliers must be used-including what products the franchisee would be required to buy from the franchisor-and the georgraphic area in which the franchise may operate.
Further, the regulation prohibits franchisors and franchise brokers from amking general representations about actual sales, income or profits unless:
There is reasonable basis for the representation.
The representation is based on information which has been prepared in accordance with generally accepted accounting principles.
The franchisor can substantiate the claims and the substantiation is available to the prospective franchisee and the FTC on demand.
Rep Abner Mikva (D III) has introduced a franchise reform bill in Congress which would deal with the alleged abuses.
"In some cases," Mikva said recently, "the franchisor's decision to cancel or refuse to renew a frachise agreement is not based upon poor performance incompetence or business setbacks, but upon the very success the franchisee has worked so hard to achieve."
The National Franchise Association Coalition, an association of various groups representing the investors of McDonald's, Kentucky Fried Chicken, Hertz, Midas Muffler and others has complained that many franchise agreements have terminated without cause, and investors have been subjected to threats and intimidation by franchisors.
Philip F. Zeidman, a Washington lawyer who represents the International Franchise Association, said yesterday that it was "inevitable" that the new FTC rules would face legal challenges from the franchisors.
He said the challenges will be based on the fact that the FTC did not follow prescribed rulemaking procedures in coming up with the regulations.
Zeidman also said that the rules would cause franchisers to have to file statements as long as 30 to 50 pages. "It is inevitable," he said, "that once the rule is in force, the FTC will find itself crushed in the volume of disclosure statements."
Zeidman claimed that the FTC staff "conceded that few franchisees investing more than $50,000 in a franchise had voiced complaints, causing a credibility gap about the supposed widespread complaint which led to the original conception of the rule."
He also expressed dismay over the fact that there exists a "patchwork quilt of state regulation, which imposes on businessmen a multiplicity of regulatory rules and statues (often inconsistent and contradictory)," but said he hoped promulgation of the FTC rule would lead eventually to single uniform standard.