Delinquent U.S. firms face franchise reform school

“It’s kind of like: ‘ Write your name on a board a thousand times,’ when you haven’t done anything wrong.”

The Globe and Mail
August 11, 1999

Delinquent U.S. firms face franchise reform school
Dan Morse

They range from a pizza chain to a cleaning service. Their relatively minor sins were committed at trade shows or in print ads in their efforts to sell franchise units.

Meet the inaugural class of the first U.S. franchise reform school, a travelling program funded by 15 big franchise companies and overseen by the U.S. Federal Trade Commission. The goal: to clean up less-serious transgressions quickly, freeing the federal body to worry about bigger problems.

So far, just five small to medium-sized franchise companies have undergone – or are scheduled to undergo – the one-day, five-hour class designed to hammer home some basics. Each will be monitored under the program for the next three years.

Program supporters say it will improve the industry’s image and, in that sense, it will be similar to the U.S. National Association of Securities Dealers Inc., a self-regulatory body of the securities industry.

But the program, called the National Franchise Council (NFC), has drawn critics and caused a split within the franchising community. Some owners of franchise units say it provides only a weak form of policing, with too much secrecy. Companies that go through the program don’t have to disclose it later to prospective franchisees.

Moreover, the program, which was conceived in 1997 and got the trade commission’s blessing last year, operates outside the purview of Washington-based International Franchise Association. The association, which tends to support franchisors over franchisees, fought the program’s formation last year.

It says it doesn’t want to “get involved in remedial” programs such as NFC, and is instead developing three education-training programs that it says are designed to prevent infractions. The programs will be tailored to franchisors, their sales executives and unit owners, according to the association.

One of the companies that has been through the NFC program is Aaron Rents Inc. of Atlanta, Aaron, which offers rent-to-own furniture, electronics and appliances, had taken out print ads in newspapers boasting “$136,000 [U.S.] in pretax earnings.” The trade commission requires cautionary language in such ads, such as an explanation of what percentage of outlets actually makes that much money.

“We were wrong, no question about it,” says Charles Loudermilk, Aaron’s chairman, who adds that the infraction was a minor over-sight. In recent ads, Aaron has added cautionary language. The company, which has been franchising since 1992, has 53 franchisees who run 138 stores.

Under the program, Neil Simon, its head, first sends a participating company a training manual. “It’s Franchise Law 101,” says Mr. Simon, who previously served as top in-house lawyer and chief lobbyist for the International Franchise Association and was a private franchise lawyer at Hogan & Hartson LLP of Washington. At the participating company, top managers review the manual and make copies of it before training, which is held at the company’s office.

The sessions have been relatively informal, with questions and dialogue. Mr. Simon covers federal and state regulations and provides logs through which companies can track registration requirements. After the training, companies can call Mr. Simon with questions about disclosure documents.

When necessary, a company can agree to mediate with aggrieved franchisees.

Mr. Simon declined to comment on any of the cases. The Wall Street Journal obtained information about the cases from the trade commission through the Freedom of Information Act.

Only large chains can join as members of NFC, and they pay $17,500 annually to support the program. Members include Tricon Restaurant Group Inc., franchisors of KFC, Taco Bell and Pizza Hut; Cendant Corp., which runs Ramada Inns, Days Inns, Avis Car Rental and Century 21 Real Estate units, among other chains; and Bass Hotels & Resorts Inc., which runs Holiday Inn hotels.

Generally, franchise companies that end up in the remedial session come to the group’s attention because of a complaint or tip of some kind. If NFC determines that a company isn’t following disclosure rules designed to protect those buying franchise units, it offers an option: Fight with the trade commission or agree to go through the NFC’s training. Faced with commission settlement talks, which can sometimes end up with a fine, small companies are expected to opt for the latter.

Noble Roman’s Pizza Inc. of Indianapolis set up at a trade show in Las Vegas last October to try to sell franchise units. But Noble Roman’s failed to back up statements of earnings that it passed out in the detailed disclosure documents.

Noble Roman’s officials have now completed their remedial duty with NFC. “It’s worked out fine,” says Paul Mobley, Noble’s chairman, who termed his company’s infraction “very minor.” He says the company distributed the sheets only at the one trade show, and no one bought a unit there anyway.

But John Fitzgerald, a lawyer for Maids International Inc., an Omaha, Neb., franchisor or residential cleaning services, wonders if the program will cause the trade commission to pursue technical issues that could be disposed of in a few phone calls. At a trade show in April in Washington, Maids touted its “MegaMarket” average monthly gross sales of $72, 843. Maids distributed official disclosure documents at the trade show, but didn’t give them to everyone representatives spoke to at the booth. The trade commission also questioned how well Maids backed up its gross sales claims.

Mr. Fitzgerald says: “It’s kind of like: ‘ Write your name on a board a thousand times,’ when you haven’t done anything wrong.”


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