A business opportunity requires payment of at least $500 for the opportunity to distribute goods and services of the seller with assistance in the form of locations or accounts. The Franchise Rule requires disclosures only to prospective purchasers. In addition to the Franchise Rule, FTC enforces section 5 of the FTC Act, which declares unlawful unfair or deceptive acts or practices in or affecting commerce. Much of the debate has centered on the relative bargaining power franchisees have when dealing with their franchisors over various issues, such as the location of new franchise outlets or the termination of franchise relationships without good cause and advance, written notice. FTC’s Complaints and Enforcement Activities Focused Mostly on Business Opportunities

FTC has focused most of its franchise and business opportunity enforcement activities on business opportunity ventures because, according to FTC staff, problems such as fraud and other types of misrepresentation are much more prevalent with business opportunities than with franchises. Statistically Reliable Data on Franchise Relationship Problems Do Not Exist

The extent and nature of franchise relationship problems are unknown because neither FTC, franchise trade associations, nor state regulatory agencies have readily available, statistically reliable data—that is, the data available are not systematically gathered or generalizable—that would indicate the full scope of these problems. Nonetheless, such data might provide valuable insights as to whether a federal statute is needed to generally regulate franchise relationships. Over the past several years, Congress and others have debated the need for a federal statute to regulate franchises and address problems that can arise after the sale of a franchise. Matter for Congressional Consideration

If Congress believes that it needs empirical data before considering franchise relationship legislation, it could commission and fund a study that would (1) design and implement an approach for collecting empirical data on the extent and nature of franchise relationship problems and (2) examine franchisor and franchisee experiences with existing remedies for resolving disputes.
Why GAO Did This Study

Franchises are business arrangements that require payment for the opportunity to sell trademarked goods and services. Business opportunity ventures do not involve a trademark, but require payment for the opportunity to distribute goods or services with assistance in the form of locations or accounts. The Federal Trade Commission's (FTC) Trade Regulation Rule on Franchising and Business Opportunity Ventures (Franchise Rule) requires franchise and business opportunity sellers to disclose financial and other information to prospective purchasers before they pay any money or sign an agreement. In addition, FTC enforces section 5 of the FTC Act, which addresses unfair or deceptive acts or practices. Over the past several years, Congress has debated the need for a federal statute to generally regulate franchises, including issues that arise between franchisors and franchisees after the franchise agreement is signed. Much of the debate centers on the relative bargaining power franchisees have when dealing with their franchisors over various issues, such as the location of new franchised outlets or the termination of franchise relationships without good cause and advance, written notice. This report reviews FTC's enforcement of its Franchise Rule and discusses various franchise relationship issues.

What GAO Found

GAO found that FTC has focused most of its Franchise Rule enforcement resources on business opportunity ventures because, according to FTC staff, problems in this area have been more pervasive than problems with franchises. The extent and nature of franchise relationship problems are unknown because of a lack of readily available, statistically reliable data--that is, the data available are not systematically gathered or generalizable. Absent such data, opinions varied as to the need for a federal statute to regulate franchise relationships. If Congress believes it needs empirical data before considering franchise relationship legislation, it could commission a study that would (1) design and implement an approach for collecting empirical data on the extent and nature of franchise relationship problems and (2) examine franchisor and franchisee experiences with existing remedies for resolving disputes.