2024 has been turbulent for the franchising industry. The ongoing joint employer saga — which was not settled until late July — had franchise owners grappling with the uncertainty of the industry-killing regulation. At the same time, inflation has placed additional strain on both franchisors and franchisees, driving up costs and squeezing profit margins.
The fast-food industry is embroiled in intense inflation-triggered value wars, with brands competing fiercely to offer the best deals to increasingly price-conscious consumers. Amidst these headwinds, franchisees are seeking innovative strategies to navigate the complexities of this ever-evolving market.
Entrepreneur asked Charles Internicola, the founding partner of Internicola Law Firm and CEO of franchise growth accelerator GoodSpark, what the franchise industry should be looking for as election day approaches — and how franchise businesses can protect themselves during uncertain political times.
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In your opinion, how could the upcoming presidential election influence the franchise industry?
The presidential election will have the greatest impact at the federal level and the eventual composition of the NLRB and if the NLRB will continue to pursue the imposition of a Joint Employer Liability Rule. NLRB board members are appointed by the president, and generally, Democrats are more inclined to support the imposition of a Joint Employer Liability Rule, with Republicans opposed to it.
What key issues should franchise owners pay attention to during the election campaign?
Franchising is all about entrepreneurship, good business practices and, most importantly, economic opportunity. So, the focus should be on managing inflation and building a solid economy where small business thrives.
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How can franchise owners best prepare for any anticipated changes?
For franchisors, franchisees and all business owners, it always comes down to the fundamentals and focusing on what you can control. Franchisors should be focused on managing their compliance obligations while focusing on the profitability and success of their franchisees.
Franchisees should be focused on managing their cash flow, maintaining reserves and providing great service.
What are the most significant pieces of legislation passed in 2024 that will impact franchises?
2024 has not necessarily been about new legislation but, rather, has been a staging ground for the introduction and evaluation of new franchise regulations and rules that will significantly impact the franchise community.
At the federal level, the Federal Trade Commission (FTC) continues to examine and reevaluate potential modifications to the current version of the Franchise Rule, which last took effect in 2007. The FTC is focused on enhanced franchisee protections through more stringent Franchise Disclosure Document requirements and the potential invalidation of certain franchise agreement provisions and requirements imposed on franchisees.
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At the state level, the North American Securities Administrators Association (NASAA) has published a Model Franchise Broker Registration Act that, if adopted at the state level, would introduce an entirely new level of franchise broker registration and disclosure requirements aimed at regulating broker activity, clarifying the relationship between franchise brokers and franchisors, informing franchise buyers about how brokers are compensated and imposing potential broker and broker organization liability for the protection of franchise buyers. Consistent with NASAA’s proposed act, California proposed its own franchise broker disclosure and registration act in its Senate Bill 919.
Can you explain how these new laws will affect franchise agreements and operations?
When they arrive, expected FTC changes to the Federal Franchise Rule will include enhancing protections for franchise buyers and franchisees. These expected changes will include modifications to FDD disclosure requirements, potential restraints on fees charged to franchisees, restrictive covenants and confidentiality requirements that may or may not be imposed on franchisees and other restrictions that may include a franchisor’s ability to modify system standards by making changes to the franchisor’s operations manual.
At the state level, we expect to see many states implement NASAA’s broker registration and regulatory framework, which will significantly impact disclosures and information provided to franchise buyers.
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What legal steps should franchise owners (franchisors) take to ensure compliance with the new 2024 legislation?
No matter the year or the pending legislation, franchisors should always be proactive about their compliance strategy. This includes fundamental practices related to FDD disclosures, sales practices, sales training and the implementation of a compliance tracking system.
Franchisors should anticipate the changes ahead and focus on implementing a more thorough FDD and a more balanced franchise agreement that avoids overreach. They should also examine their franchise agreement protections and provisions and evaluate what’s practical and needed to protect their franchise system and what may be unnecessary.
Are there any common pitfalls or misconceptions that franchise owners should avoid when adapting to these new laws?
The most common pitfall is not being proactive about the planning and issuance of their FDD and franchise agreement structure. Franchisors should be continuously examining and auditing their franchise agreements and their compliance practices.
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