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Full Disclosure Laws in Franchising: An Empirical Investigation

RANCHISING is a system of distributing goods and services that has three distinguishing characteristics: (1) one party (the franchisor) grants to another party (the franchisee) the right to distribute or sell certain goods or services; (2) the franchisee agrees to operate his business according to a marketing plan substantially prescribed by the franchisor; and (3) the franchisee operates his business substantially under a trademark or trade name owned by the franchisor. The franchise system of distribution annually creates new business opportunities, new services, new jobs, and new export opportunities. Although the system dates back at least to the early 1900s (with automobile, tire, and petroleum products), about 90% of all present franchisors started their businesses since 1953. Growth has been primarily in such areas as fast foods, convenience groceries, business services, hotels and motels, recreation, entertainment, and travel.' The franchise system of distribution accounts for nearly one-third of total retail sales in the United States, and it provides employment for approximately three million people.2 With this rapid growth, however, franchising has increasingly come under the scrutiny of federal and state governments. An important recent development is the passage by ten states (as of 1975) of full disclosure laws aimed at controlling unfair practices in the selling of franchises. Under these laws, franchisors must give ample unbiased information to franchisees to help them make wise investment decisions. This article examines the issue of full disclosure laws in franchising by first reviewing some of the legal problems in franchising and discussing some legislative remedies. Then the results of an empirical study of the effects of the full disclosure laws on franchising are presented. Finally, the costs and benefits of the full disclosure laws are evaluated.