Washington, D.C. – U.S. Senator Catherine Cortez Masto (D-Nev.) introduced legislation to protect entrepreneurs from bad actors in the franchise industry who use deceptive financial information to sell underperforming or unprofitable businesses. The SBA Franchise Loan Disclosure Act would require that any prospective franchise owner seeking a loan backed by the Small Business Administration (SBA) receive accurate historical revenue and store closure information from the franchise corporation before getting the loan approved.
“The SBA guarantees loans for hundreds of thousands of franchise businesses without taking adequate steps to protect entrepreneurs from being misled by unscrupulous franchisors. As a result, franchisees are being set up to fail, struggling to keep their doors open, and even losing their entire life savings,” said Senator Cortez Masto. “My bill would bring greater transparency to the SBA guaranteed loan process and allow prospective franchisees to make informed decisions before purchasing a business.”
“I appreciate Senator Cortez Masto’s leadership to make sure franchisees are treated more fairly. The whole reason to buy a franchise is that they are proven business models with historical financial information. Profits, revenues, and store closing information should be made available to the entrepreneurs before we invest our hard-earned savings in a business venture,” said Vishal Sharma, a former franchise owner from Reno.
“The commitment that Senator Cortez Masto has shown to the franchisee community is immeasurable. By introducing this bill, she has stood with franchisees to protect them and their investments in the franchising business. It is vital that franchisees get the correct information before investing in a franchise and when government SBA loans are used. This bill protects everyone,” said John Motta, Chairman of the Coalition of Franchisee Associations.
“Senator Cortez Masto has become a strong advocate for franchise owners, and the introduction of this legislation sends a signal to the industry that transparency is vital, especially when government loan guarantees are used. We appreciate the Senator’s efforts and look forward to further engaging franchisees in this cause,” said Keith Miller, principal of Franchisee Advocacy Consulting and a franchise owner.
In May, Senator Cortez Masto sent a letter to the SBA inquiring into loan defaults by four franchise brands with stores in Nevada. The agency’s response revealed these franchises had high default rates.
Earlier this month, the senator highlighted the issue at a hearing of the Senate Banking Committee’s Subcommittee on Economic Policy, where she questioned Miller about how unscrupulous franchisors prey on hard-working Americans, particularly on immigrants, veterans, retirees, and other vulnerable groups.
The SBA Franchise Loan Disclosure Act would require any taxpayer-backed SBA loan to a franchise to provide:
- The average and median first-year revenue for all franchise locations for each of the preceding three years;
- The number of franchise locations that went out of business or were sold by the franchisee during the first year of operation for each of the preceding three years; and
- The average and median revenues for all locations of the franchise for each of the preceding three years of operation.
It would ensure that prospective franchisees get the same information as the lender and are not misled by franchisors or consultants who provide them with false revenue numbers in an attempt to push them into buying an unsuccessful franchise.
Full text of the bill is available here.