The franchise model has consistently faced major changes since the first instance of modern-day franchising in 1891. Over time, practices have evolved and formed what we know franchising to be today. Now, the industry is once again facing further changes with “responsible franchising” policy recommendations recently introduced by the International Franchise Association (IFA).

Building on its 2012 Statement of Guiding Principles, which highlighted its “continuing effort to advance improvements in franchise practices,” the IFA’s new recommended guidelines promote responsible franchising by all parties involved in the franchise process—franchisors, franchisees, and suppliers. Keep reading to learn about these guidelines and their potential impact on certain franchising practices.

WHAT ARE THE RESPONSIBLE FRANCHISING GUIDELINES?

The IFA formed working groups of franchisors, franchisees, and franchise suppliers to create recommendations aimed at modernizing the franchise sales process. The association believes that enhancing the franchising sales process, specifically when the the franchisor provides the franchisee with their franchise disclosure document (FDD) before anything is signed and finalized, is an important way to improve franchising outcomes.

Why target the FDD stage? Citing a recent GAO investigation, the IFA explains that prospective franchisees may not completely read or understand the 23-item document, mainly because of how long and complex it can be. If a franchisee does not fully comprehend this critical document outlining crucial elements of the investment, they may enter the opportunity uninformed and underprepared.

Some of the main objectives of these recommendations include improving the franchise model by increasing transparency, encouraging franchisees to conduct more thorough due diligence before investing, and encouraging third-party suppliers to make disclosures.

Here is a snapshot of the new proposed guidelines, which are highlighted in full in the IFA’s Responsible Franchising toolkit:

Franchisors: One of the underlying goals of the guidelines is to make the information in the FDD more accessible and easier to understand. The IFA recommends:

  • The format be conversational and include question and answer–style layouts
  • Including an executive summary so prospective franchisees can compare the key aspects of all the franchise businesses they’re considering
  • Improving the presentation of the details around the initial investment, financial performance, and more to showcase the health of a franchise system
  • Adding more illustrations and text to explain important sections further
  • Incorporating the use of multimedia

Franchisees: The IFA recognizes how significant an investment franchising can be and believes it’s the prospective franchisee’s responsibility to do their due diligence, including fully understanding the FDD, before investing. According to their recommendations, prospective franchisees should:

  • Investigate their investment, including comparing franchise brands
  • Meet with current franchisees to assess a franchise opportunity
  • Understand the risks and obligations involved in franchising

Suppliers: There are several franchise supplier businesses, including third-party franchise sellers, that many prospective franchisees can turn to while considering franchise opportunities, including franchise brokers, advisors, and more. Because of the significant role these suppliers can have in the franchising journey, the IFA recommends that third-party franchise sellers should provide details on:

  • Recent experience
  • Litigation history
  • Any services that they implement on a franchisor’s behalf
  • The various types of third-party franchise sellers and any questions a prospective franchisee may ask them
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THE POTENTIAL IMPACT OF THE IFA’S NEW GUIDELINES

There are several obvious ways these guidelines can impact franchising, such as how franchisors create and format details in their FDD to be more accessible, the active steps prospective franchisees complete before investing, and the disclosures suppliers provide. However, there are also intangible impacts from these guidelines, including greater transparency, a boost in confidence that prospective franchisees have about their investment, and more.

If these new guidelines are widely adopted, important details will no longer be buried in an FDD’s fine print, and heavy use of confusing legal jargon will be discouraged. When FDDs become easier to understand, thanks to illustration-based formatting and conversational layouts, more trust can develop between a franchisee and franchisor, strengthening their relationship. The franchisor won’t worry that the franchisee doesn’t fully understand the guidelines and practices outlined in the FDD, while the franchisee won’t feel like they’re entering the investment uninformed.

With the implementation of these new standards, franchisors will be held accountable for adhering to the new guidelines when creating their FDD. Meanwhile, franchise suppliers will also be required to disclose more information, outlining their experience, history, and other key features to increase transparency.

The IFA asks franchising policymakers to support these modifications to the Franchise Rule, which the Federal Trade Commission federally regulates and is currently under review. Learn more about it here. As the IFA works with Congress, these policy changes can infiltrate the franchising model at the federal level.

FRANCHISING WITH DOGTOPIA

The Dogtopia franchising team is committed to transparency in all stages of prospective franchisees’ sales journeys. From listing our financial requirements to encouraging prospective franchisees to hear from our current franchisees, our team works to create a franchise support system that sets our franchisees up for success. Learn why a Dogtopia franchise could be a great business for you and your family.