UnhappyFranchisee.Com asked leading franchisee attorneys – those who deal with franchise regulation (and the lack thereof) on a daily basis – whether the characterization of franchising as “highly regulated” is accurate.
(See IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In).
Does the presence Franchise Disclosure Documents (FDDs), franchise agreements, website disclaimers, disclosure waiting period and other procedural hoops franchisors jump through mean that a given franchise opportunity is reviewed, vetted, approved and overseen by government agencies who watch out for and protect franchise investors?
Indianapolis-based franchise attorney Josh Brown contends that franchise buyers he meets mistakenly believe that franchising is “policed” to a much greater extent than it is.
“Most people I meet with do believe that the industry is policed more than it actually is” writes Brown. “They erroneously believe that the stack of docs they receive that make up the FDD & other related agreements somehow legitimizes the franchisor.”
Brown believes that the lack of franchise legislation is not as damaging as the misperception that compliance with standards means that a given franchise has its act together.
Brown writes that some “…franchisors seduce would-be buyers to believe that the systems are better organized and more profitable than they actually are.”
Read Josh Brown’s response to our inquiry below.
Franchising is Not Policed as Much as You Think
by Josh Brown
As compared to many other small businesses, franchised businesses are highly regulated. However, as compared to other industries that are regulated by the federal and certain state governments, not so much. That said, Indiana has some pretty good statutes in place to help protect franchisees above and beyond the protection from the federal government.
Most people I meet with do believe that the industry is policed more than it actually is. They usually are not so sure about the regulations, but they erroneously believe that the stack of docs they receive that make up the FDD & other related agreements somehow legitimizes the franchisor.
I counsel would-be franchisees to dig much much deeper than the FDD. These docs are broad, general, and contain a lot of information that can be easily misconstrued and misunderstood. But to many franchise buyers, the FDD is where they start and finish their search. They unfortunately believe that the FDD contains everything that they need to know, and they blindly believe what is told to them by franchisors.
I really don’t think, though, that the myth of the highly policed nature of franchises is that damaging. In my opinion, this is not ever really top of mind in the eyes of the franchisees. It may serve as some sort of comfort to them when they are told how highly regulated the industry is, but I really don’t believe it moves the decision-making meter.
More of a danger is the damaging way in which some franchisors seduce would-be buyers to believe that the systems are better organized and more profitable than they actually are, which is is just downright misleading and unethical.
Josh Brown is a franchise attorney, based in Indianapolis, Indiana. He provides legal services to help entrepreneurs build great companies, and individuals succeed through franchising.
Josh’s practice is limited to franchise & small business matters. He helps people buy, own & sell franchises, and serves as outside general counsel for small businesses (under 50 employees) and start-ups.
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