WASHINGTON – U.S. Senate Committee on Small Business & Entrepreneurship Chair Ben Cardin (D-Md.) today convened a hearing to examine the franchising business model, the opportunities it creates, the role the U.S. Small Business Administration (SBA) plays in helping entrepreneurs open franchises, as well as the agency’s role in protecting entrepreneurs from deceptive marketing and bad actors.
“For many small business owners, franchising has been a path to the middle class and financial security. For many others, opening a franchise has led to financial ruin,” Senator Cardin said during his opening statement. “The model has its risks, with a disproportionate amount falling on the franchisee … Congress can help maintain and improve this successful business model while increasing transparency to protect entrepreneurs chasing the American Dream from bad actors and fraudsters.”
The most common franchise business model is when a franchisor provides a business system, training, products, and branding to a franchisee in exchange for a fee and ongoing royalties. The model is practiced by some of the largest companies in the world, including McDonald’s, Subway, and the UPS Store. It allows large companies to build efficient supply chains and can be used by growing companies to accelerate expansion. Franchising also allows entrepreneurs to buy into an established brand, product, and concept—bypassing the market research and product development required during the startup phase of a new business.
The committee heard testimony from Senator Catherine Cortez Masto (D-Nev.), who issued a report in April of last year on the harmful practices committed by bad actors in the franchising industry.
“Our small business owners don’t expect their businesses to be risk-free. But if they purchase a franchise, they absolutely deserve to know what they’re getting into,” Cortez Masto said during the hearing. “Right now, that’s not always the case, and the Small Business Administration can do more to fix it.”
Cortez Masto also discussed the SBA Franchise Loan Disclosure Act and SBA Franchise Loan Transparency Act—legislation she has introduced to protect entrepreneurs from predatory practices.
Cardin lauded the bills during the hearing, saying, “It seems to me that the requirements in your two bills, if we were to categorize those franchises that have been most successful, they comply with those requirements. They’re already making that information available to potential franchisees. It seems to me what your bill is doing is establishing best practices in the field in an effort to make sure that the concept of franchising maintains a standard that will allow it to grow in the future, so I applaud you for that legislation”
