What GAO found
Franchising is a common type of business arrangement in the United States that can offer benefits to individuals interested in owning their own business. The franchisees and stakeholders interviewed by Gao described the risks and challenges they face after purchasing a franchise (see figure).
Risks and challenges that franchise owners can face when operating a franchise
The FTC’s franchise rule requires franchisors to disclose in writing certain information to prospective franchisees to allow them to compare the risks and benefits of buying a franchise. The FTC also publishes a guide for prospective franchisees that highlights challenges they may face and key aspects of disclosure. However, according to some stakeholders interviewed with GAO, prospective franchisees don’t always read the disclosure in its entirety, even though it contains key information for decision-making. In addition, participants in eight of nine FGDs with franchisees told GAO that they were not familiar with the FTC’s evidence. By strengthening its efforts to educate potential franchisees about the importance of the disclosure document and publicizing its guide more widely, the FTC can improve potential franchisees’ ability to make informed decisions.
The FTC uses consumer complaints to report on its regulatory and enforcement activities, but franchise owners’ concerns may not go unreported. A GAO analysis of FTC complaint data showed that from 2018 through 2022, there were about 5,900 franchise-related complaints, which is less than 1 percent of all complaints received. However, the number of complaints may not fully reflect the scale of problems faced by franchisees. For example, while franchisors in all of the GAO discussion groups identified concerns about their franchisor’s practices, participants in eight of the nine groups said they never filed a complaint with the FTC because they weren’t aware of their ability to do so. The stakeholders provided additional reasons why franchise owners could not file complaints with the FTC. For example, they said, franchisors may fear violating the terms of their contracts by speaking out against their franchisors. The FTC has modified its complaints system to make it easier for franchise owners to navigate. However, without additional efforts to increase awareness and education of the franchise community and work with stakeholders to improve franchisee awareness and understanding of the complaint process, the FTC may not have an accurate representation of concerns to inform oversight and enforcement activity.
Why gow this study
Franchising enables prospective owners to purchase the right to operate a branch of a branded business. Franchisees pay a fee to the franchisor, and in return they get the right to use the franchisor’s name and operate using his business model for a set number of years. Section 5 of the FTC Code, which prohibits unfair or deceptive actions or practices in or affecting commerce, and the Franchise Rule gives the FTC authority to oversee certain aspects of the franchise.
The Government Accountability Office was asked to review the Federal Trade Commission’s oversight of the franchise. This report examines (1) the challenges franchisors report encountering in operating franchises and the FTC’s efforts to educate potential franchisees and (2) how the FTC oversees franchisees.
The Government Accountability Office reviewed laws and regulations related to the franchise and FTC statements and documents related to complaints and investigations related to the franchise. GAO conducted nine discussion groups with 44 franchisees, chosen to represent a variety of industry types. GAO also interviewed FTC officials and 25 franchisees (attorneys, trade association representatives, and franchisors).