What are the biggest obstacles facing small businesses? Contrary to conventional wisdom, it isn’t always government. In fact, for many small businesses in California, the main source of bureaucracy, red tape, interference, fine-print traps, and threats to financial stability is a big corporation, not the government.
Tens of thousands of California entrepreneurs have invested in franchised businesses like McDonald’s, 7-Eleven, and Subway because the franchisor corporations promise that ownership in a brand outlet offers technical assistance and the relative safety of a known brand; instead, too many find that they are entering a fundamentally unequal and imbalanced corporate relationship that puts their life work and life savings at risk. As a result, small businesses that are franchisees – which represent 80,000 businesses and one million jobs in California, are having a harder and harder time keeping their businesses afloat.
That’s why Small Business California has joined the Coalition of Franchisee Associations to support AB 525 (Holden), which seeks to provide basic parameters for a fair business relationship. A bi-partisan bill that is now being considered in the state Senate, AB 525 will help stabilize small businesses that are franchises at a time when these job-creating enterprises are increasingly insecure. A new analysis of Small Business Administration data finds one in three taxpayer-backed loans to franchisees in California ends in failure, and this rate is on the rise.
Increasingly, multi-billion dollar global corporations in the fast food, hotel, convenience store, and other franchise-heavy sectors are using provisions in their one-sided contracts to squeeze more and more out of family-owned businesses or terminate franchise owners over tiny infractions of company-set rules.
In a recent survey of nearly 500 California franchise business owners, more than half said they can’t earn a living from their business. 73% reported being forced to pay new fees or charges that were not part of their original franchise agreement. 78% reported that parent companies had made changes in operating rules that came with a cost to franchisees, but didn’t increase revenues. Non-compliance comes with a high cost. Four in 10 California franchisees report being threatened to have their companies taken away for taking actions they thought were appropriate for their business. Their worries are understandable – California franchise owners have lost their businesses for speaking out against parent corporations. Others have had the stores they’ve labored to make profitable taken back by the corporation – punished for being successful.
When franchise businesses fail, consequences for our communities are deep. Failure means an owner loses not only the business, but also the personal assets they’ve invested as collateral. When franchise business start-ups are backed by the Small Business Administration, taxpayers are on the hook for repaying the loan. Employees lose their jobs.
These community consequences are among the key reasons California leaders must help stabilize small businesses that are franchises by passing AB 525. This common-sense legislation protects franchisees against unfair terminations, and reserves franchisees’ rights to pass onto family members the businesses they’ve worked hard to build.
The franchise sector has changed in recent decades; many of the giant corporate franchisors view their franchisees as mines to extract profit from. These global giants are represented by the International Franchise Association, which is ramping up an intensive lobbying campaign aimed keeping a hold on every aspect of business operations – and control of every dollar. Legislators should be cautious of the rhetoric bought and paid for by the multinational franchisors: if the contracts are fair, why oppose rules that simply require a fair shake? The answer is simple: it threatens their extractive profit model.
California has the opportunity to strengthen small businesses that are franchisees and the jobs they support with legislation with AB 525. This sensible bill deserves the Senate’s support and Governor Brown’s signature.