Entrepreneurs considering buying a franchise will get more information as amended federal disclosure requirements take effect.
Anytime Fitness, the fast-growing Hastings-based franchisor, is getting a workout as 2008 begins.
The extra activity has more to do with complying with changes to federal franchise rules, however, than keeping up with competitors.
The company, like most franchise sellers nationally, is spending the first few weeks of January updating the offering circular that goes to prospective franchisees to meet new disclosure obligations specified in the amended franchise rules.
“Initially it will require some more work on our part, but we like the idea of disclosing more information,” Jennifer Yiangou, director of operations at Anytime Fitness, said in reply to questions submitted via e-mail. “I think prospective franchisees would be more likely to get involved with a franchise that tells the whole story. I believe the new rules will definitely work in our favor.”
The company, founded in 2002, opened its first franchised club that year in Cambridge, Minn. It has 600 clubs operating in 45 states and expects to mark the opening of its 1,000th club by year’s end. By July 1, all companies in the country that offer franchises must comply with the amended federal rules, which are designed to make franchise operations easier to analyze and compare. The Federal Trade Commission adopted the changes last year in the first substantial overhaul of franchise regulations since they took effect in 1979.
Buying a franchise is a popular path for many entrepreneurs. But doing so also can be costly, requiring tens or hundreds of thousands of dollars in initial fees and expenses to open a franchise location.
Franchisees also pay continuing royalties, often based on a percentage of weekly or monthly gross revenue, to be part of the franchise system.
The FTC’s disclosure rules are designed to protect franchisees and their investments.
In Minnesota, one of 15 states with pre-sale franchise disclosure laws, companies cannot sell or offer franchises after June 30 unless they have filed documents complying with both the federal disclosure rules and the state’s franchise act, according to a statement last month from the Minnesota Department of Commerce. Wisconsin also requires franchises to register.
More and better information
Twin Cities attorney Charles Modell, whose franchisor clients include both start-ups and multinational companies, said he expected that 99 percent of the nation’s franchise companies would have converted to the new disclosure format by the end of March.
Franchise companies have to register with the state each year to continue offering franchises in Minnesota anyway, so most are working on the changes now instead of waiting until the midyear deadline, said Modell, a shareholder at Larkin Hoffman Daly & Lindgren in Minneapolis.
Minnesota’s franchise disclosure requirements date to the early 1970s, and were among the first in the country, Modell said. A longtime Larkin Hoffman partner, Edward Driscoll, helped write the Minnesota law, Modell noted.
The new federal rules require franchisors to disclose more information about openings, closings and transfers of franchises over the previous three years, Modell said. It also allows franchise companies to deliver disclosure documents electronically.
“The idea is to give more information, better information, to prospective franchisees,” Modell said.
Still, the changes do not go far enough to suit some franchisees, said attorney Ronald Gardner of Dady & Garner in Minneapolis. The FTC rules fail to address the relationship between franchise companies and franchisors, where more conflicts tend to occur over such issues as termination of a franchisee without good cause, restrictions on transfers or even succession arrangements.
“There continues to be nothing regulating the back-end of the relationship,” Gardner said. “Once you’ve become a franchisee, the rule has zero effect,” leaving franchisees dependent on state laws.
Another problem for franchisees, Gardner said, is that the rule “doesn’t have a lot of teeth.” A client who gets a faulty disclosure can only complain to the FTC and hope the agency will take action; the rule does not provide for a private right of action against a franchise company.
The FTC left franchise companies the option of disclosing earnings, something franchisees had hoped would become mandatory. Few franchisors make earnings claims in disclosure documents; those who do now have to provide a reasonable basis for those claims.
In practice, prospects usually get a sense of the financial results they can expect in “cocktail napkin discussions,” with franchisors, Gardner said.
“The FTC rule both before and after is pretty good, as far as it goes, except the earnings claim,” Gardner said. “It provides a good amount of information…. I’d like them not to pretend that it addresses everything because it doesn’t.”
‘A little less complex’
John Francis, franchise developer in Minnesota and Wisconsin for PostNet International Franchise Corp. whose outlets offer packing, mailing and other business services, said the new disclosure form makes it easier for prospective franchisees to compare franchises.
Luckily for Francis, who operates a franchised PostNet store in St. Paul, the company headquarters in Denver will provide him the modified documents he will have to file in Minnesota and Wisconsin.
PostNet requires Francis to go through its disclosure documents with each prospective franchisee.
“With the new format I think that process will go a lot easier,” said Francis, who is on the board of directors of the International Franchise Association. “The old document was pretty intimidating — huge, complex, easy to misinterpret. Now it’s still just as big but a little less complex. I believe people will be more likely to go through it.”
Source: Star Tribune