Although franchisees make up a relatively small percentage of our consulting practice at MSA Worldwide, we highly value and prioritize the success of franchisees both in our work, and in our overarching philosophy. As a well-known franchise consultant firm, our primary clients are domestic and international franchisors; but we also frequently lecture and publish books and articles focused on helping prospective and existing franchisees. From our extensive experience, we know that great franchisors focus on providing support to their franchisees.
In this article we emphasize both the importance of expanded franchise disclosure, and of prospective franchisees always conducting proper due diligence before investing in a franchise.
Without successful franchisees, the franchise business model fails
A major concern of franchisee advocates is that many, if not most, prospective franchisees don’t get enough quality guidance and support when making their franchise investment.
- Despite the urging of the Federal Trade Commission and most franchise professionals, franchisee candidates frequently do not engage experienced franchisee attorneys to help them review a franchisor’s disclosure document and to conduct supported due diligence on the franchise opportunity.
- Too often, the only advisor a prospective franchisee works with is the internal or third-party franchise sales professional representing the franchisor they are interested in investing in.
Franchise seller disclosure in California: SB919
Recently, franchising’s focus has been on new California legislation that will require franchise sellers to provide a broker disclosure document to prospective franchisees. This legislation, State Bill 919, modifies the California Franchise Investment Law and was signed into law by Governor Newsom on September 24, 2024. Franchise sellers will need to comply with this new law beginning in June of 2026.
MSA Worldwide worked on the International Franchise Association’s (IFA) task force that drove the initiative and crafted the baseline for SB919. We spent a great deal of time examining the industry of “selling franchises” and why this type of disclosure is needed. The purpose of California’s SB919 is to clarify the relationship between the prospective franchisee and the third-party franchise seller; the relationship between the third-party franchise seller and the franchisor; and to provide the prospect with basic information on the background and experience of the broker.
SB919 was the first time that the three organizations representing franchisors and franchisees in the United States – the IFA, AAFD, and CFA – all aligned on a new piece of franchise legislation. This alignment underscores the necessity of third-party franchise seller disclosure. It’s likely that SB919 will quickly trigger similar laws in other states, and that state franchise regulators may independently adopt similar broker disclosure requirements.
Franchising’s contribution to the U.S. economy
Based on my decades of experience in franchising, I can attest that franchising, as an overall business strategy, has proven a very successful approach both for company expansion, and the creation of wealth for individual franchisee investors. Franchising also creates job opportunities for entry-level workers and those on the first rung of their economic futures.
The IFA publishes annual statistics on franchising’s impact in the U.S. domestic economy. These studies show, year after year, growth both in the number of franchised locations open and operating, and in jobs created by franchising and the economic impact franchising has on the U.S. economy. However – the IFA information is developed primarily for government and public relations, and is not intended to lead a potential franchisee to believe that all franchise opportunities are equally successful.
Franchising industry statistics can be misused
Years ago Matt Shay, then President of the IFA, sent out several notices to IFA members asking franchise sellers not to quote industry-wide franchise success statistics when marketing their franchises. That practice – by some franchise sellers – had created a problem of prospective franchisees believing that if franchising overall was successful, the particular opportunity they were examining would also be successful.
- Even where accurate, using industry-wide franchising statistics to market a specific franchise investment is troublesome.
- While franchising is a very successful business model, that does not mean every franchise opportunity will be equally successful.
- Framing franchise statistics improperly can be deceiving to an inexperienced franchisee investor.
This problematic sales practice continues today
Search LinkedIn franchisee recruitment posts by some third-party franchise sellers, and you will find many that cite franchise statistics – some accurate, but some seemingly without a modicum of fact. This gives a false impression to the prospective franchisee on the performance of the brands they are researching. This sales approach is akin to a stockbroker marketing an individual investment to an inexperienced investor based on how well the entire Dow Jones is performing. We all know that even when the market is up, some stocks are still going down.
FDD disclosure is not enough to protect franchisees’ investments
The Franchise Disclosure Document provides a prospective franchisee with significant information on the franchise being offered. But, it is not all of the information needed to make an informed investment decision. The disclosures contained in Item 19 on unit economics and Item 20 on system stability and growth are clearly two of the most important pieces of information for a prospective franchisee to understand.
- However, neither is sufficient on its own, because they have little to do with the performance of a potential location; the information provided generally reflects the historic results of a larger pool of mature operations.
- Overall, any disclosure document needs to be considered as only the starting point for analyzing any franchise investment.
There’s no shortcut or substitute for properly executed and professionally supported due diligence when making a franchise investment. Too many potential franchisees rush the process by relying on the advice of internal or external franchise salespeople who are compensated by the franchisor for the sale.
Qualified franchisee lawyers are essential
Prospective franchisees frequently compound the mistake of accepting advice from the franchise seller by failing to engage proper legal and business advisors of their own. It’s often argued that franchise lawyers are expensive and not essential to evaluating a franchise opportunity, because the franchise agreement is an adhesion contract and the terms in one franchise agreement are not materially different from another. However, having worked for decades with many franchise systems, I can attest that franchisees who take the unnecessary risk of failing to engage a qualified franchise lawyer do themselves an incredible disservice. If the cost of professional advisors is outside their budget, they should wait until they can afford to properly make that investment.
MSA’s Franchisee Lawyers List
Prospective franchisees should understand that the local lawyer who helped you close on your house, or even who you’ve used for other businesses, will often generally not have sufficient knowledge about franchising to assist you properly. To make it easier for prospective franchisees to locate qualified franchise lawyers, the MSA website provides a state-by-state contact list of experienced franchisee lawyers.
Never rush your franchise decision-making process
Many problems that appear after a franchise agreement is signed, are avoided when the prospective franchisee conducts a proper and supported due diligence on the individual franchise investment. The franchisor will respect your diligence. Despite what the seller may say regarding the opportunity slipping away if you don’t move quickly, it or a similar opportunity will always be available. Don’t get caught up in the emotion of the buy.
In selecting your franchise opportunity, take your time, do your due diligence, and engage qualified professionals to assist you. While the franchise seller you will be working with is generally experienced, knowledgeable and ethical, it’s important to remember that they work for the franchisor. The fact that they earn their commission only when you sign the franchise agreement creates a potential conflict of interest in the guidance they provide. Despite how much you may like, respect, and trust them, be smart and independently engage a qualified franchise lawyer.
Resources for conducting franchise due diligence
MSA Worldwide provides a workbook for prospective franchisees to use as they examine franchise investments. The Making the Franchise Decision workbook is published on the California Department of Financial Protection and Innovation website. It’s free, and will give you extra guidance on what to ask and what to look for in a franchise offering.
Becoming a franchisee can be a terrific investment. I can promise that when you begin to explore the opportunities available in franchising, you’ll find many investment opportunities that exceed your financial and other expectations. Don’t limit your sources of information in identifying possible franchise opportunities to invest in. As a long-time board member of the IFA, I’m partial to starting any search for franchise opportunities by looking at the franchisor members of the IFA.
Do a lot of research, and make an independent visit to those opportunities that interest you. Become educated on franchising and the franchise recruitment process. Each franchise seller will have their own process, and you should respect it. The IFA website has many articles on franchising, and there is also a library of free franchising articles on MSA’s website. I also suggest you read Franchise Management for Dummies which I authored with Joyce Mazero, a well-known and respected franchise attorney. It’s an easy read.
My best advice in selecting any franchise is simply – take your time. Owning a franchise can be a very successful investment opportunity. Just don’t rush or shortchange the process.
By Michael Seid, Managing Director, MSA Worldwide
MSA Worldwide is the nation’s leading franchise consulting firm providing strategic advice and tactical services to established and emerging franchisors in the United States and internationally. MSA’s services include franchise feasibility analysis, franchise program development, franchise relations strategies, franchise system expansion strategy, operation assessment and support, manuals and training programs, franchise litigation consulting and expert testimony. For more information on MSA, visit www.msaworldwide.com, or call us for a complimentary consultation at 860-523-4257.