Published: Jul 18, 2024
by Annie Pilon
In Small Business News
The Federal Trade Commission recently issued new guidance to protect franchisees from certain fees and rules set by franchisors. There has been controversy in recent years regarding large chains charging undisclosed fees that make independent franchises less profitable, as well as the use of non-disparagement clauses that prevent franchisees from communicating openly with government regulators.
In terms of the fees, the FTC said in a press release, “It is illegal for franchisors to impose undisclosed junk fees—fees that raise costs and which may make the difference between a profitable franchise and an unsustainable one,” the FTC said in a press release.
These fees have become more commonplace in recent years, with many brands imposing technology or payment processing fees that were not disclosed in franchise disclosure documents. These fees are generally smaller than the larger expenses like royalties and marketing fees. But by not disclosing these to potential franchisees early in the process, brands can make it more difficult for independent franchisees to turn a profit, particularly in industries with tight profit margins like food service.
The second element of the FTC’s recent guidance essentially clarifies that it is not legal for brands to include contractual terms with franchisees that bars them from talking to regulators under the guise of non-disparagement clauses.
FTC Chair Lina Khan said in a statement, “Contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal.”
Essentially, both of these changes improve franchisees’ transparency. It increases transparency in the fee structure so that franchisees can make more informed decisions throughout the process. And it allows franchisees to be more forthcoming with federal agencies if they believe their franchisor is breaking the rules.
Many franchisors were already following these practices. But those that weren’t will now need to change their processes going forward.
Image: Shutterstock
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Annie Pilon is a Senior Staff Writer for Small Business Trends and has been a member of the team for 12 years. Annie covers feature stories, community news and in-depth, expert-based guides. She has a bachelor’s degree from Columbia College Chicago in Journalism and Marketing Communications.
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