Howard Coble Oversight Hearing

As a conservative Republican who supports smaller government and less regulation, many people have asked me why I support franchise legislation. First of all…it's about protecting freedom. The freedom for small business franchisees to contract fairly, honestly, and without fear of retribution.

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U.S.A. House of Representatives
June 24, 1999

Oversight Hearing on the Franchising Relationship
Howard Coble (NC-6)

United States of America
House of Representatives
Subcommittee on Commercial and Administrative Law

HOWARD COBLE (NC-6)

Chairman Gekas, Ranking Member Nadler, members of the subcommittee, thank you for allowing me to testify this morning. I don't think the Subcommittee could choose a more worthwhile endeavor than protecting the freedom to pursue the American Dream by leveling the playing field for thousands of small business franchisees across this country.

While I'm glad to see my good friends from the International Franchise Association in the audience today, I must admit that I am very disappointed this committee will not be hearing from one of IFA's official representatives who have been aggressively lobbying the Hill against franchise legislation. While I recognize that IFA has chosen to speak through one of its association members, this individual — who I'm certain will do an outstanding job representing IFA's position — only represents a small segment of the franchising industry.

If the committee will indulge me for a moment, I would like to give you a little background on the investment a franchisee must make when opening a franchised business. While these are general ranges on investment, a typical individual looking to invest in a franchise operation must pay the parent corporation an initial licensing fee ranging from $3,000 to $100,000. They also must invest another $100,000 to several million dollars in equipment, signs, and supplies; then they may spend another $12,000 to $30,000 for opening inventory. Other miscellaneous opening expenses of as much as $50,000 may also be necessary. As you can see, the total price tag for one franchised unit can be as high as several million dollars. On top of this initial investment, the small business franchisee may have to pay rent to the parent corporation. At the same time, they must also be prepared to provide benefits and meet a payroll for their employees prior to earning one dime in sales. Once open for business, the small business person pays a percentage of gross sales, not net sales, to the franchisor. Typically these payments range between 5 and 12 percent, but can reach as high as 20 percent. On top of all this, a mandatory payment into a pooled advertising fund is often required and this is usually about 3 percent.

After hearing this, I am sure you are wondering why anyone would invest in a franchised business. Not only is it incredibly expensive but with this expense comes various corporate strings. For instance, where you may locate or build your outlet; where you must buy your supplies; what price you must charge for your goods and/or services; and to whom you may sell your investment and on what terms to name a few.

When speaking to this point of franchisor power and abuse, you don't have to look any further than the horse's mouth. A major franchisor indicated in a recent press release that "to alleviate its debt load and boost stagnant sales", the company would be shifting more burden onto its franchisees. Did the franchisees have a say in this decision? Of course not. Nonetheless, the franchisor had the unilateral power and right to dump its burden onto the franchisees.

As you know, Mr. Chairman, at the end of the 105th Congress, Congressman Conyers and I introduced legislation to establish a more level playing field in the business relationship between corporations that sell franchises and the small businessmen and women who invest in them. Earlier this year, I met with several representatives of the International Franchise Association to discuss their concerns with our legislation. During this meeting, I asked IFA to analyze our bill, section-by-section, and explain to me in writing why any single provision of the bill would be harmful to franchising. Two and one-half months later, I received a two-page letter — which I would like to submit for the record — from IFA outlining its problems. Well my friends, I am here to tell you that if these are the only problems IFA has with the bill — and I must assume these are since I asked for a comprehensive analysis of our legislation — we are much closer to passing franchise legislation than anyone realizes.

I think we all recognize that the goals of the franchisor/franchisee relationship are fundamentally economic where the objective of each party is to make money. Capitalism at its best one would think. Unfortunately, that's where the mutuality ends. In the context of a means to an end, the interests of the franchisee and franchisor aren't always the same. For instance, because the parent corporations collect royalties on sales, not profits, it's in the corporate franchisor's interest to open more outlets, even if it's at the expense of an existing franchisee.

Human nature tells us that there are bad apples in every bunch, and this applies to both franchisors and franchisees. All franchisors are not bad actors, in fact, there are some who support our legislation. By the same token, all franchisees are not choir boys. Nonetheless, the recent increases in franchising-related litigation and complaints to the Federal Trade Commission lead me to believe that Congress must examine this matter.

As a conservative Republican who supports smaller government and less regulation, many people have asked me why I support franchise legislation. First of all, the legislation which we introduced is not about bigger government and more regulation — it's about protecting freedom. The freedom for small business franchisees to contract fairly, honestly, and without fear of retribution. Secondly, the Constitution provides Congress with the authority to regulate interstate commerce which Congress has already done for some franchisees by enacting the Petroleum Marketers Act and the Auto Dealers Day in Court Act. The time has come to apply these same standards to all franchise business relationships.

In closing, I think we all would agree that small businesses are the heart and soul of our nation's economy, however, it is important to recognize that many of these small business opportunities would not have been available without the assistance of the franchisor community. After all, they provide franchisees with a recognized brand name, advertising and marketing knowledge and support, and training.

I hope the testimony we hear today will help us craft a bill that is fair and balanced. We are not seeking to penalize anyone. We only seek to bring some order and sanity to a segment of our economy which is growing and may be growing out of control.

Again, thank you for allowing me to testify, and I look forward to working with the committee on this issue that is important to so many of our nation's small business operators.

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