International Law

New Franchise Disclosure Rule

Richard Gibson, writing about franchising, for the WSJ has an article on the new FTC franchise rule.

He writes:

"Franchisers will have to list any lawsuits they've filed against franchisees in the past year.

Previously, only franchisee-initiated litigation had to be reported.

That means, for example, that a franchiser suing to collect late royalties from franchisees -- a possible indicator of a financially troubled chain -- would have to make that public."

This change is not a big deal, anyone with a pacer.gov account can find out far more about the legal and litigation background of the franchisor.

Next he writes about item 20 disclosure, how many transfers there have been;

"The revised regulations simplify how franchisers report franchise turnover, transfers and terminations for the past three years, which, again, should make a potentially troubled franchiser easier to spot.

"Under the old rule it was fairly easy to disguise store failure from a new franchisee coming in," says Carmen Caruso, an attorney who handles franchising cases at Stahl Cowen Crowley Addis LLC in Chicago.

Carmen is a bright guy, and a good franchisee lawyer.  But, neither Richard nor Carmen point out how to use the item 20 disclosure: take the number of transfers, assume that they are all merely failures, and divide through by the number of units open and you have a crude measure of a disaster risk.

But he does have one thing dead on:

"Like the 30-year-old rules they update, the revisions deal only with presale matters -- not issues that might arise after a franchisee has signed up."

Without a vibrant and successful franchisee association, once you have signed up for a franchise you are at the  mercy of the ongoing good character of the franchisor - which may disappear in a heart beat because of the transfer, sale, or assignment of the system.

Full post as published by Misleading Advertising Law on July 31, 2008 (boomark / email).