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Attorney Howard Bundy: Franchising is Hardly Regulated at All

December 20, 2013

According to franchisee attorneys like Howard Bundy, it’s time to debunk the dangerous myth that the franchisee-franchisor relationship is “highly regulated.”

Individuals and groups like the IFA (International Franchise Association) use the argument that franchising is already “highly regulated” to combat legislation designed to make the balance of power in the franchisee-franchisor relationship at least slightly more reasonable.

Franchise opportunity peddlers use the myth of franchise regulation like a bedtime story, comforting franchise prospects with the illusion that Big Brother is watching out for their best interests.

UnhappyFranchisee.Com has asked leading franchisee attorneys whether the characterization of franchising as “highly regulated” is accurate.

Franchise attorney Howard Bundy graciously contributed his opinion, which is posted below.

(For other responses and discussion, see IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In).

Franchising is Hardly Regulated at All

by Howard Bundy

Franchising is not highly regulated. In truth, one could say that it is hardly regulated at all. If you want to see regulations, look at industries like securities, insurance, banking, construction and health care. Ask any contractor standing in line for a permit or waiting for an inspection about regulation. Ask an insurance executive as they are negotiating the details, including pricing, of their policy agreements with 50 state insurance officials. Franchising is subject to only a light touch of regulations—for the most part only even touching on what the franchisor can say before the sale. In almost all states, the franchisor can do anything to the franchisee after the sale with no risk of governmental action or liability.

Unfortunately, franchise sellers have, for years, used the fact that the government imposes very general pre-sale disclosure obligations (and registration in a handful of states) to sell their franchises to unwitting franchisees by, among other things, telling them that “the FTC approves our FDD” or some state “approved our FDD” or that “franchising is highly regulated . . . so you don’t have to worry”. As a result, with those few franchisees who seek counsel before they invest, we have to spend an inordinate amount of time, energy and resources explaining that no government agency has approved . . . or even reviewed the FDD. Regrettably, many franchisees are so persuaded that their government has looked out for them that they see no value in consulting counsel.

I would agree with those who say it is all the franchisee’s fault that they fall for the scams and fraud—that they should have done their due diligence. However, that “buyer beware” attitude does not work well when one of the parties is a sophisticated business person with knowledgeable and experienced counsel and consultants on retainer and the other is being told that he/she needs no experience with the business—or in any business—that “we will train you and teach you everything you need to know and we will be there all long the way so you are in business for yourself and not by yourself.” Follow that with a sales pitch that says, “yeah, I have to tell you to get a lawyer . . . but I don’t know why you would waste the money, these contracts are not negotiable and lawyers only kill dreams” and you have a perfect storm. Inexperienced people make bad decisions, based on emotion instead of solid business and legal risk analysis.

We have extensive regulations to protect people who invest fifty dollars in a piece of paper (stock). We have extensive regulations to protect people who buy insurance policies—or buy a house. There is nothing morally repulsive about regulations that attempt to level the playing field when that same individual is investing over a million dollars (often including retirement funds that would otherwise be exempt from creditor claims) in what they believe will be a business but turns out to be nothing but a rented job. It is long past time to bury the old saw of “they should have done more due diligence.”

Howard BundyHoward Bundy is a franchise attorney practicing primarily in the Seattle, Washington area since 1981. Howard represents franchisees in dispute resolution and prospective franchisees in transactional matters and in performing due diligence.  He also assists franchisors in transactional matters, including preparation of franchise agreements, disclosure documents and getting them registered as appropriate to lawfully offer and sell franchises.

WHAT DO YOU THINK?  IS FRANCHISING “HIGHLY REGULATED” AS THE IFA AND FRANCHISE SALESPEOPLE CLAIM?  SHARE YOUR OPINION BELOW.

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