Franchising is a great business opportunity, but it comes with its problems. That’s the sentiment of Dunkin’ franchisee John Motta, who was one of many attendees of a Federal Trade Commission-led digital roundtable.
Motta described how with some franchises, new owners may not get to know their franchisees. He said they can also make changes to the brand or the franchise agreement which benefit the franchisors, but not the franchisees.
“I’ve gone through multiple changes with the Dunkin’ brand during my 44 years with them,” Motta said. “Some of the changes have been great, some not so great. Franchising itself is great, especially when that relationship is working. But when it’s not, it can be an anxious time for franchisees.”
FTC Chair Lina Khan held the roundtable this week to hear challenges franchisees face with franchisor relations.
Held Tuesday, the webinar centered on how franchising can be fairer, and representatives of several franchisee organizations attended. They included the Asian Hotel Owners Association, the Coalition of Franchisee Associations and the American Association of Franchisees and Dealers.
In several of the responses by those attending, concerns revolved around quick changes by the franchisor that can catch a franchisee off guard. Motta, chair of the CFA, shared his Dunkin’ experiences.
“The relationship between franchisees and franchisors is critical for the franchise,” Motta said. “I am lucky to be part of the Dunkin’ system, which I can attest that the relationship is fantastic. But when the management changes, or the brand is sold, there is a risk that the relationship may go south.”
David Bear, executive director of the National Owners Association for McDonald’s restaurants, had a similar sentiment. In his comments, Bear gave a recent example of McDonald’s making it more challenging to transfer ownership within the family to the next generation.
David Bear, executive director of the National Owners Association
“The American dream allows transferring the family business to the next generation, so the legacy, economic security and community philanthropy can carry on,” Bear said. “Recent changes in corporate philosophy have resulted in an over-reaching, and, at some times, oppressive control by our franchisors, including new hurdles in transferring businesses to our children, even when they meet operational standards.”
Bear also said McDonald’s is now mandating that a franchisee must reapply for their franchise businesses after a 20-year term. Additionally, Bear said McDonald’s is making franchise ownership sales more strenuous.
“When a franchisee determines they want to sell, McDonald’s has been interfering in free trade activities by limiting the purchase candidate pool to a small, hand-selected eligible community,” Bear said. “They’re even establishing valuation limitations.”
Representing the AAFD was COO and Executive Director Richard Stroiney. In franchising since 2009, Stroiney said the model is a good one for business but added that franchisees can sometimes feel like they have little say in a franchise system.
Richard Stroiney, COO and executive director of the American Association of Franchisees and Dealers
“I fully respect the franchisors’ business model and would submit there are franchisors that respect and work well with franchisees,” Stroiney said. “However, when they don’t, the risk lies heavily with the franchisees, whose voice is limited, and they don’t have the franchisors’ legal funds.”
This extends to when changes are made to the franchise system, such as what the previous presenters had mentioned.
“The franchisees’ hands are tied when the franchisors leverage changes in the operating manuals to force changes, or in the model itself,” Stroiney said. “This minimizes the franchisees’ ability to negotiate contractually and allows the franchisor to put terms, conditions and financial burdens that are not disclosed in the FDD. By failing to disclose changes in the FDD, current and future franchisees have little knowledge or say in what can be significant changes.”
Speaking on behalf of the AAHOA was Chair Bharat Patel, who offered another issue in the form of having vendors mandated by the franchisors.
Asian American Hotel Owners Association Chair Bharat Patel
“We have mandated vendors who are charging higher prices to the franchisees and sending rebates or commissions back to the franchisors,” Patel said. “We should have competition between vendors to provide better products, services and lower costs. We need to explore how this practice can be stopped, or have the rebates be fully disclosed for the benefit of franchisees.”
Tuesday’s webinar comes nearly two months after the FTC announced a request for public comment on franchise agreements and franchisor business practices, including how franchisors exert control over franchisees and their employees. The FTC’s goal is to find out how franchisors disclose aspects of contract sand the overall franchise relationship.
“We started this market inquiry to get more details on these franchisor-franchise relationships,” Khan said. “This conversation is helpful, but we’re encouraging you to continue submitting comments.”
The feedback period on the public comment period ends Tuesday, May 9. Comments can be submitted at regulations.gov.