The Role of Government
in Promoting the Growth of the
Franchising Industry
History of U.S. Government
Regulation of Franchising
• 1970: CA 1st Disclosure-Registration Law
• 1973: 11 U.S. states had franchise
regulations
• 1975: MSAA – UFOC format
• 1979: FTC Franchise Rule
• 1981: NASAA – UFOC
• 1986: NASAA Modifications to UFOC
• 1993: NASAA Modifications to UFOC
• 2007: FTC Franchise Rule revised
Thrust of Governmental
Regulation
• Franchise Disclosure Document (FOC)
• 23 Chapters of “Material” Information
• Audited Financial Statements
• All Contracts Used
• State Registration Process in 14
States
• 10 Day Rule
•
5 Day Rule
Drawbacks of Governmental
Regulation
• No Minimum Standards/Requirements
- eBay iSold It! franchise (below)
• No Disclosure of Earnings
• Lack of Detailed Financial Investment Data
• Unfair Contractual Provisions Allowed
• No Effective Consumer Protection Remedies
- Mail Boxes, Etc. franchise (below)
The MBE - UPS Saga
• UPS: a $30B Fortune 500 Company - acquired MBE
- $180M for a network of 4,000 MBE stores ($45,000 ea.)
- how to get owners to switch from “MBE” to UPS?
• Gold Shield Program - required amendment to contract
- the MBE business model was “broken”
- rebrand … or else AND follow UPS-mandated pricing
• Shift from many carriers to one …. UPS
- one MBE owner did more than $500,000/year in Fed-X
• 90% of MBE network rebranded to UPS
- make as little as $0.50 on many transactions
• CAFIL: illegal to solicit an amendment
- unless a lot of detailed paperwork is filed
- disclose what the financial impact will be
- and allow owners to freely decide
• 10% of MBE network who didn’t rebrand?
- at renewal : only given new UPS contract to sign
- not what the original MBE contract said
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November, 2003: eBay drop-off store started
December, 2003: franchise program started
CA Dept. of Corporations collected its filing fee
2006: nearly 200 drop-off stores operating
Entrepreneur Magazine: #1 Top New Franchises
- December 2005: loss of $1.1 million
- September 2006: loss of more than $4 million
• April 5, 2007 CEO Letter : > 60 closed & more struggling
“many people have lost sizeable investments, including
homes and retirement savings”
Role of Government In The
New Millennium
• Disclosure Of Pertinent Information
capital required to breakeven
earnings by company-owned & franchised
• Registration - Review Process
• Minimum Requirements To Franchise
length of time, profitable operations, etc.
• Enforcement Teeth – Rights to Rescind
• Enforcement Teeth – Private Cause of Action
Role of Franchise
Associations
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Mission Statement: protect, enhance,
promote
Membership
Code of Conduct: apply by 3d parties?
Continuing Education Programs
Monitoring Trends
Legislative Lobbying
International Franchise Expos
U.S. – IFA (1960)
World Franchise Council (1994)