Senator Calls For FTC, SBA Crackdown on Franchising

U.S. Sen. Catherine Cortez Masto of Nevada has released an 87-page report on the franchise industry, outlining what she calls unfair and sometimes deceptive practices that can leave franchisees bankrupt and U.S. taxpayers covering the losses.

Calling for greater oversight of the franchise industry from both the Federal Trade Commission and Small Business Administration, the Democratic Senator said inflated revenue projections, overcharges, misleading contracts and forced arbitration were among the most egregious practices.

“Owning a franchise business can be a good opportunity for an eager entrepreneur,” Cortez Mastro told 1851 Franchise. “But for too long, some franchise corporations and lenders have been allowed to treat entrepreneurs unfairly, which cascades into low-wage employment and store closings. I am alarmed by these stories of small business owners in Nevada and across the country losing so much at the hands of deceptive and misleading corporations and lenders.”

The report called out ten franchise brands for their deceptive practices — including Burgerim, Subway, Dickey’s and Quiznos — while noting Dunkin’ and Popeyes as franchises that worked for their franchisees.

The Senator called for Congress to tighten laws surrounding disclosure requirements for franchise brands that seek federally-guaranteed loans, including Small Business Administration loans for “at-risk” franchises and to let franchisees sue franchisors for violations of franchise regulations.

This isn’t the first time Cortez Mastro has voiced complaints about franchise practices. In April 2020, the Senator urged the Federal Trade Commission to make changes to the Franchise Rule in response to the COVID-19 pandemic. 

In May 2019, Cortez Mastro sent a letter to the Small Business Administration, questioning the SBA’s practice of guaranteeing loans tied to “franchises with a history of complaints about unfair and deceptive practices.”

And in July 2019, she introduced legislation to protect entrepreneurs from bad actors in the franchise industry who use deceptive financial information to sell underperforming or unprofitable businesses.

But under President Joe Biden’s Administration and a Democratic-controlled Congress, Cortez Mastro’s efforts to protect franchisee rights are more likely to succeed and arguably even more necessary.

“The COVID-19 pandemic has increased the appeal of franchising for people looking for new opportunities after losing their job or business,” Cortez Mastro told 1851 Franchise. "I’m concerned that some entrepreneurs may decide to purchase a franchise at a 'discount' without being aware of the risks they are taking. “I’ll continue to introduce legislation to protect franchise owners. I hope this report and these stories encourage the franchise sector, the Biden Administration, and Congress to institute reforms to protect franchise owners.”