April 14, 2021

Cortez Masto Leads Legislation to Curb Harmful Practices in the Franchise Sector, Protect Small Business Owners

Washington, D.C. – U.S. Senator Catherine Cortez Masto (D-Nev.) re-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 Transparency Act, cosponsored by Senators Diane Feinstein (D-Calif.), Tammy Baldwin (D-Wisc.), Chris Murphy (D-Conn.), and Elizabeth Warren (D-Mass.), would require that a prospective franchise owner receive accurate historical revenue and store closure information from the franchise corporation before the Small Business Administration (SBA) approves any loan to the franchise owner. Cortez Masto’s legislation will help address many of the troubling practices affecting businesses operating as franchises, which she outlined earlier this week in an alarming new report on the franchise sector.                          

“Franchise owners in Nevada and around the country have told me about how franchise corporations painted rosy pictures of the money these businesses could make—and how they later found out that they’d sunk their life savings into unprofitable stores. Taxpayers and small business owners fund the Small Business Administration loans that many franchise owners use to go into the franchise business, and taxpayers and small business owners are the ones who pick up the tab if franchise businesses fail. For the sake of both small business owners and the public, franchise corporations should have to give historically accurate financial performance information to anyone applying for these government-backed loans. I’ll keep working to protect small businesses from harmful practices in the franchise sector.”

Cortez Masto has repeatedly stood up for small business owners and is leading efforts in the Senate to protect franchise owners who have been taken advantage of by a broken system. After hearing from franchise owners about harmful practices by franchise corporations, Senator Cortez Masto’s office released an alarming report on the problem. The report describes how some unscrupulous corporations squeeze franchise owners for profits. Senator Cortez Masto has championed a range of solutions to the problem, including greater transparency and oversight to protect small business owners.

The SBA Franchise Loan Transparency 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.