Alicia Miller
The International Franchise Association endorsed amending the California Franchise Investment Law to expand disclosure requirements for third-party sellers (e.g. brokers, broker networks, and franchise sales organizations) of franchises in California. (If approved, effective July 1, 2025.) Other states are likely to follow California’s lead, but not all.
Third-party sellers such as brokers and franchise sales organizations, or FSOs, are an important part of the franchise ecosystem. Emerging brands often depend on these partners. And larger, especially private equity-backed brands, may also employ sales agents to accelerate growth. This “built to flip” phenomena, and flipping again later to another sponsor in a few years, is discussed in my recent book about PE’s impact on franchising.
But using outsourced sales channels is also a gamble. Franchisors have the final say over which prospects become franchisees. But communication threads in an outside-managed sales process aren’t always visible to the franchisor. Things can be lost in translation, accidentally miscommunicated, and yes, bad actors can take advantage. If franchisors don’t adequately validate what prospects heard during the sales process, it can result in wrong matches and misaligned expectations.
The amendment states, “Any person who offers or sells a franchise … shall be liable to the franchisee or sub-franchisor, who may sue for damages caused thereby, and if the violation is willful, the franchisee may also sue for rescission.” The third-party seller will also, “be liable to the franchisor, who may sue for damages or may assert claims of indemnity against the third-party franchise seller caused by the violation.” Ouch! Franchisees and franchisors could sue agents.
How many brokers and outsourced sales reps carry personal errors and omissions insurance today? How many are prepared to defend their sales process in court? Will broker agencies and FSOs pay to defend their agents, or will they instead assert, “The sales rep acted alone”?
The Uniform Third-Party Franchise Seller Disclosure Form would require information on seller compensation and seller professional experience. It would also require disclosure of “Any administrative, civil, or criminal actions alleging that the third-party franchise seller, or an owner, officer, or director of the third-party franchise seller, violated any franchise, antitrust, or securities law, or committed fraud, unfair or deceptive practices, or similar violations, whether pending or resolved, (emphasis is mine) within the last five years;” and “Contact information for all franchisees sold a franchise by the third-party agent anywhere in the United States or its territories (not just California, emphasis is mine) during the last calendar year, including … the total number of units sold to each franchisee.”
For the last point, I personally think a year is too short, since problems may not manifest until after units open. But even so, this is a big change in favor of transparency.
Disclosure a good start
I was once contacted on LinkedIn by a new broker. After a week of training (she was an unemployed nurse changing careers), she reached out to sell me a franchise. Leaving aside that my LinkedIn profile is covered in all things franchising, it was clear she was not set up for success. Neither were prospective franchisees she planned to advise.
She had no franchise knowledge, no due diligence or business experience, and had never read a franchise disclosure document. I told her I was skeptical, and my reasons. She asked, “What’s an FDD?” (You can’t make this stuff up.) If the rule passes, she would carry significantly more risk related to her advisory services in California than she’d likely make in commission. Is one week enough training to take that risk?
I have many friends in the broker community who have a decade or more of experience. They have successfully advised hundreds of people and take their role very seriously. From my perspective, one positive of the proposed rule change is that casual franchise sellers and bad actors are more likely to exit. This should clear out some of the noise and leave prospective franchisees in more experienced hands. It will also be easier for the brokers who stay to make a living. They won’t be competing for attention and leads with so many part-timers and newbies. The cost to be part of these networks may need to change if there are fewer participants. Costs for the remaining agents may go up, but competition for leads (in theory) should come down.
The new disclosures will be a goldmine for due diligence, but I imagine also for attorneys on both sides of disputes. Updated disclosures will make it much easier to track sales activities across systems. It is difficult for outsiders to see how much sales volume is moving through outsourced sales channels; that’s about to change.
Will some FSOs and brokers stop selling in California? Will bad actors shift their focus to other states? I think “yes” to both. Will the research and discovery process of California franchisee candidates shift toward artificial intelligence tools as fewer third parties engage directly in the sale process? Who is liable for bad information found via AI channels?
Will the extra disclosures change franchisees’ approach? Many prospective franchisees today don’t bother to read all the information disclosed to them, don’t speak to an attorney before buying and don’t do as many validation calls as they should. This new disclosure is more information for buyers to digest.
My hope (not my expectation) is that buyers will read the new information carefully. It is unclear to me whether agent disclosures could actually shield agents from effective legal actions later. Aka: “You (the prospective franchisee) knew about all these lawsuits and bought from this agent anyway?”
From my perspective, merely disclosing doesn’t go far enough. We need professional licensing of franchise salespeople, not just registration. We need standardized training and testing. It’s not just for the benefit of franchisees. This also protects the livelihoods of brokers and agents doing the right thing because they’re not forced to compete with others taking shortcuts. It not only elevates respect for the advisory role done well, but also elevates franchising. But this is a welcome first step.
Alicia Miller is the founder and managing director of Emergent Growth Advisors. Her Development Savvy column covers smart ways to market and grow a franchise. She is also the author of “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” Reach her at amiller@emergentgrowthadvisors.com.