FTC: Top 12 Franchise Owner Complaints
In 2023, franchise owners submitted hundreds of complaints to the FTC regarding the franchise relationship, franchise regulations and the lack of protection for franchisee investors. Here are their Top 12 complaints.
(UnhappyFranchisee.Com) From March 10, 2023 to June 8, 2023 the Federal Trade Commission (FTC) solicited public comments from “a broad range of stakeholders” about “how franchising is working well, and how it is not.”
(The FTC has recently reopened its invitation for comments and is inviting additional submissions through October 10, 2024 to be submitted here)
The FTC Request for Information (RFI) focused on six main issues: (1) the franchise relationship; (2) provisions of the franchise agreement; (3) franchisor business practices; (4) payments to franchisors from third parties; (5) indirect effects on franchisee labor costs; and (6) language barriers.
The Commission received over 2,200 posted public comments.
The Top 12 “issues” (complaints) submitted by franchisees in response to the 2023 RFI were recently published in the FTC document titled:
FRANCHISE ISSUE SPOTLIGHT: Risks to Small Business Success in Franchising [PDF].
Here is are the Top 12 Franchise Owner Complaints submitted to the FTC:
“Top Dozen Concerns for Franchisees”
1. Unilateral changes to franchise operating manuals
“The top concern raised by franchisees was frustration over franchisors unilaterally changing the terms of operating manuals that set requirements for franchisees. For one franchisee, the result was “a massive overhaul, which . . . effectively turned the operations manual into a de facto franchise agreement.”16F17 Significant changes flagged by commenters during the agreement included “add-on service[s],” changes to operating hours, and restrictions on use of vendors.17F18 One franchisee decried a “a recent ops manual change [that]. . . add[ed] a $100,000 liquidated damages provision” that had not been disclosed in the Franchise Disclosure Document (“FDD”)
2. Franchisor misrepresentations and deception
“…Franchisees discussed misrepresentations franchisors made during the sales process. Start-up costs and sales, revenue, and profit data were some of the critical areas where commenters reported receiving information they believed was false or misleading. One commenter described “sales data that does not add up,” and a “completely false” estimated profit margin…
“Commenters described dire consequences from these reported misstatements. For example, one stated that “[M]y experiences have been nothing short of a nightmare, marked by deception, mistreatment, and severe financial hardship. As of today, my family is saddled with over $900,000 of commercial lease liability and a $250,000 SBA loan, as well as the accumulation of losses from opening and operating the franchise.”
3. Fees and royalties
“Many franchisees commented on high fees and royalties imposed by franchisors, particularly credit card processing fees and technology fees. Reported fees for one commenter “went from an additional 3%, 5%, 7%, 10% to now . . . 14%” making it “impossible for [them] to earn a good living anymore.”
4. Franchise supply restrictions and vendor kickbacks
“Many franchisees expressed frustration with being forced to buy from a short list of franchisor approved suppliers. Several commenters expressed that these required vendors charged prices exceeding those in the open market, and/or involved products that were not core to brand consistency. As one franchisee explained, “[j]ust simply looking online or going to Walmart, Tom Thumb, Kroger, etc … will show these exact same items from the exact same suppliers at a lower price [and that] local stores are 15 to 30% cheaper.” For another, “the exact same equipment from other suppliers was at least $80k cheaper than with the supplier they were making us go with.”
5. Actual and feared retaliation
“About one quarter of franchisee comments were anonymous, with about a quarter of those commenters specifically citing retaliation fears as the reason for their anonymity. Many [comments] “I am writing this anonymously, because I am afraid of retaliation.” Commenters described, among other scenarios, retaliation for franchisees’ active participation in an independent franchisee association or reporting unscrupulous franchisors to law enforcement. Blocked expansion, early/unjust terminations, and surprise inspection failures were tools franchisors reportedly used to threaten franchisees. One trade group summed up some franchisors’ message to their franchisees: “If you fight any battle, you will lose the war.”
“…the FTC has issued a policy statement making clear that it is unlawful for franchisors to use non-disparagement, goodwill, or confidentiality clauses to directly or indirectly restrict franchisees’ communications with state or federal law enforcement or regulators…”
6. Non-competes and no-poach clauses
“Several commenters stressed the inherent unfairness of a non-compete as an additional restraint on leaving a franchise.70F71 In the words of one franchisee commenter, non-competes are “unfair to franchisees and can limit competition in the marketplace” given that they “can severely limit the franchisee’s ability to pursue other opportunities and earn a livelihood, especially if they have invested a significant amount of time and money into the franchised business.
“The FTC recently banned non-compete agreements between businesses (including franchised businesses) and their workers, but the rule does not apply to non-compete agreements between franchisors and franchisees…”
7. Franchise renewal problems
“…several commenters described the renewal process as an area in need of reform. One franchisee explained: “My franchisor has too much leverage at the time of renewal. If I do not like the terms of the renewal agreement, I have 2 very bad choices: 1) Sign the agreement or 2) refuse to sign the agreement and lose my business altogether.”83F84 Franchisees are often presented with materially different terms than those they originally agreed to, with one terming their renewal contract “ludicrous as the fee is higher than previously.” Another discussed “substantial changes to the franchise agreement, such that it no longer even remotely resembles the franchise agreement that I originally signed.”
8. Franchisor refusal to negotiate contract terms
“Many commenters expressed frustration that their franchise agreements were presented as “takeit-or-leave-it” contracts.95F96 As one franchisee discussed, “[t]he franchise agreement was not negotiable in any way, shape, form, or fashion.” This was also discussed as a disincentive to fully reading and understanding the FDD and franchise agreement, since the terms are nonnegotiable.97F98 Some franchisees reported regretting caving to what they characterized as franchisor pressure to hastily agree to these non-negotiable contracts. These non-negotiable contracts often include provisions allowing unilateral changes by franchisors.” [See complaint #1]
9. Franchise Disclosure Document issues
“…many franchisees complained of incomplete or misleading FDDs. For example, one franchisee says the FDD indicated a “41% profit margin,” but those numbers were from “using a different business model” so “81% of owners are profiting less than $2,500 a month or losing money (51% losing more than $2.5k/mo).”103F104 Some franchisees complained of new fees that should have been disclosed in the FDD.104F105 Others reported that build-out cost estimates were artificially low, resulting in stark differences in franchisee profitability. Another reportedly was told in the FDD that “cost to build out would be about $270,000 to $350,000” yet the final “build out totaled $535,000.”
10. Private equity takeovers
“…Private equity’s reliance on debt and the mandate for growth can shift franchisor resources toward interest payments, rather than to strengthening the brand or providing franchisees with operational support. Indeed, many franchisee comments noted decreased levels of franchisor support after acquisition by a private-equity fund. These commenters noted increased fees, cost-cutting measures that harmed long-term franchisee interests, loss of renewal opportunities, and compromising product or service quality to maximize short-term profitability. For example, one commenter said that “Private Equ[]ity companies are ruining franchising. . . We have no protection, no support, no options – just punitive restrictions and way higher fees.”
11. Marketing fund transparency
“… concerns about transparency in how marketing funds are used were among the top concerns raised by franchisees… Fees can
be high; one franchisee decried a “4.5% advertising fee of which we have been refused any accounting information on how these funds are being used.” In the words of another, “[w]e pay a 2% marketing fee to the ‘Brand Fund’. We have never received any type of information where this money goes to.” Some stated that the funds were used for advertisements not in their area while others stated that funds were used to disproportionately benefit franchisors and corporate-owned locations. Others similarly stated marketing funds were used to recruit other franchisees, not customers to franchisee businesses. For example, one commenter stated that “all [the marketing] I see is ‘Buy a franchise.’”
“Several franchisees used the term “slush fund” to describe the marketing fund, which they believe is used to enrich the franchisor…”
12. Liquidated damages clauses and early termination fees
“Several franchisees singled out liquidated damages clauses as trapping them in unprofitable franchise systems. Many franchise agreements require fees when the franchisee prematurely terminates the agreement, which can include unpaid royalties or pre-calculated damage sums, known as liquidated damages. Franchisees reported being locked into losing investments, as they are unable to afford the early termination fee.
“…Others reported liquidated damages clauses being used to keep franchisees in line with threats of premature default. As one commenter explained, they “can also serve as the final trap that forces franchisees to submit to the anti-competitive practices of the franchisor without any ability to cancel without significant harm.”
We Thank the FTC for Listening & Sharing Franchisee Concerns & Issues!
Related Reading & Reference:
FRANCHISEES: Federal Trade Commission (FTC) Wants Your Input on Franchise Practices, Need for Regulation
JDOG Franchise Owners Urged to Share Their Experiences, Opinions With FTC
Public Comments on Provisions of Franchise Agreements and Franchisor Business Practices
Policy Statement of the Federal Trade Commission on Franchisee’s Right to Communicate
FTC Staff Guidance on the Unlawfulness of Undisclosed Fees Imposed on Franchisees
The JDog Report: An Urgent Call to End the Exploitation of Veterans in Franchising [PDF]
Submit consumer or franchise complaints to the FTC here:
Federal Trade Commission (FTC) Report Fraud Portal
TAGS: Franchisee complaints, franchise owner complaints, franchising issues, Top 12 Franchise Complaints, buying a franchise, reasons not to buy a franchise, FTC, Federal Trade Commission, franchise fairness, franchise unfairness
