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The Role of Government

The Role of Government. in Promoting the Growth of the Franchising Industry. History of U.S. Government Regulation of Franchising. 1970: CA 1 st Disclosure-Registration Law 1973: 11 U.S. states had franchise regulations 1975: MSAA – UFOC format 1979: FTC Franchise Rule

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The Role of Government

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  1. The Role of Government in Promoting the Growth of the Franchising Industry

  2. History of U.S. Government Regulation of Franchising • 1970: CA 1st Disclosure-Registration Law • 1973: 11 U.S. states had franchise regulations • 1975: MSAA – UFOC format • 1979: FTC Franchise Rule • 1981: NASAA – UFOC • 1986: NASAA Modifications to UFOC • 1993: NASAA Modifications to UFOC • 2007: FTC Franchise Rule revised

  3. Thrust of Governmental Regulation • Franchise Disclosure Document (FOC) • 23 Chapters of “Material” Information • Audited Financial Statements • All Contracts Used • State Registration Process in 14 States • 10 Day Rule • 5 Day Rule

  4. Drawbacks of Governmental Regulation • No Minimum Standards/Requirements - eBay iSold It! franchise (below) • No Disclosure of Earnings • Lack of Detailed Financial Investment Data • Unfair Contractual Provisions Allowed • No Effective Consumer Protection Remedies - Mail Boxes, Etc. franchise (below)

  5. The MBE - UPS Saga • UPS: a $30B Fortune 500 Company - acquired MBE - $180M for a network of 4,000 MBE stores ($45,000 ea.) - how to get owners to switch from “MBE” to UPS? • Gold Shield Program - required amendment to contract - the MBE business model was “broken” - rebrand … or else AND follow UPS-mandated pricing • Shift from many carriers to one …. UPS - one MBE owner did more than $500,000/year in Fed-X

  6. 90% of MBE network rebranded to UPS - make as little as $0.50 on many transactions • CAFIL: illegal to solicit an amendment - unless a lot of detailed paperwork is filed - disclose what the financial impact will be - and allow owners to freely decide • 10% of MBE network who didn’t rebrand? - at renewal : only given new UPS contract to sign - not what the original MBE contract said

  7. November, 2003: eBay drop-off store started • December, 2003: franchise program started • CA Dept. of Corporations collected its filing fee • 2006: nearly 200 drop-off stores operating • Entrepreneur Magazine: #1 Top New Franchises - December 2005: loss of $1.1 million - September 2006: loss of more than $4 million • April 5, 2007 CEO Letter : > 60 closed & more struggling “many people have lost sizeable investments, including homes and retirement savings”

  8. Role of Government In The New Millennium • Disclosure Of Pertinent Information capital required to breakeven earnings by company-owned & franchised • Registration - Review Process • Minimum Requirements To Franchise length of time, profitable operations, etc. • Enforcement Teeth – Rights to Rescind • Enforcement Teeth – Private Cause of Action

  9. Role of Franchise Associations • Mission Statement: protect, enhance, promote • Membership • Code of Conduct: apply by 3d parties? • Continuing Education Programs • Monitoring Trends • Legislative Lobbying • International Franchise Expos • U.S. – IFA (1960) • World Franchise Council (1994)

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