WASHINGTON — A week after a Senate Banking Committee hearing exposed fraudulent practices in the franchise industry, an association that protects small-business owners on Thursday applauded legislation filed to close loopholes and protect people who take out loans to operate such businesses.
The bill was filed Wednesday by Sen. Catherine Cortez Masto, D-Nev., after she heard from constituents who have been left in dire financial straits after purchasing a franchise with loans and savings, only to have the businesses founder due to inaccurate data and projections from franchise companies.
In many cases, Small Business Administration loans were obtained without adequate steps to protect those buying businesses from being misled by unscrupulous franchisers, Cortez Masto said.
“As a result, franchisees are being set up to fail, struggling to keep their doors open and even losing their entire life savings,” said Cortez Masto, the ranking Democrat on the Senate Banking subcommittee on economic policy.
Her bill, the SBA Franchise Loan Disclosure Act, would require franchise companies to provide average and median first-year revenues for locations the previous three years and disclose the number of franchises that went out of business during those years.
That information, and revenue disclosures, would be required before a person
receives a Small Business Administration loan to help purchase a franchise.
The bill has drawn the support of the Coalition of Franchisee Associations.
“Franchisees often invest their life savings into building their business. As such, the SBA should require that franchisers provide clear and accurate data on the success of their brand to these prospective small business owners,” said John Motta, chairman of the association.
Cortez Masto said her bill would bring more transparency to the SBA guaranteed loan process and allow franchisees “to make informed decisions before purchasing a business.”
The senator sent a letter to the SBA in May inquiring about loan defaults by four franchise brands with stores in the Nevada. The agency responded that the four franchises — Subway, Dickey’s Barbecue Pit, Complete Nutrition and Experimac — had high default rates.
During a Senate Banking subcommittee hearing, Keith Miller, a franchisee consultant, spoke of policies by franchises that require the franchisee to purchase supplies from the franchiser at high prices. He also said many of those seeking to buy a franchise get financial advice to obtain SBA loans from those associated with the franchiser.
Cortez Masto said many of those who have fallen victim to unethical or fraudulent practices by the bad apples in the franchise industry are immigrants, veterans and retirees looking to start their own businesses.