    [Senate Hearing 117-242]
    [From the U.S. Government Publishing Office]

                          SMALL BUSINESS FRANCHISING:
                          AN OVERVIEW OF THE INDUSTRY,
                     SBA'S ROLE, AND LEGISLATIVE PROPOSALS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                              AND ENTREPRENEURSHIP

                                     of the

                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 16, 2022

                                   __________

        Printed for the Committee on Small Business and Entrepreneurship

      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            Available via the World Wide Web: http://www.govinfo.gov

                                ______

                 U.S. GOVERNMENT PUBLISHING OFFICE
    47-361PDF           WASHINGTON : 2022

                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                  ----------
                     BENJAMIN L. CARDIN, Maryland, Chairman
                      RAND PAUL, Kentucky, Ranking Member
    MARIA CANTWELL, Washington           MARCO RUBIO, Florida
    JEANNE SHAHEEN, New Hampshire        JAMES E. RISCH, Idaho
    EDWARD J. MARKEY, Massachusetts      TIM SCOTT, South Carolina
    CORY A. BOOKER, New Jersey           JONI ERNST, Iowa
    CHRISTOPHER A. COONS, Delaware       JAMES M. INHOFE, Oklahoma
    MAZIE HIRONO, Hawaii                 TODD YOUNG, Indiana
    TAMMY DUCKWORTH, Illinois            JOHN KENNEDY, Louisiana
    JACKY ROSEN, Nevada                  JOSH HAWLEY, Missouri
    JOHN HICKENLOOPER, Colorado          ROGER MARSHALL, Kansas
                     Sean Moore, Democratic Staff Director
                  William Henderson, Republican Staff Director

                                C O N T E N T S

                                  ----------

                               Opening Statements

                                                                       Page

    Cardin, Hon. Benjamin L., Chairman, a U.S. Senator from Maryland.     1
    Paul, Hon. Rand, Ranking Member, a U.S. Senator from Kentucky....     2

                                   Witnesses
                                    Panel 1

    Cortez Masto, Hon. Catherine, United States Senate, Washington,
      DC.............................................................    14

                                    Panel 2

    Emerson, Mr. Robert W., Huber Hurst Professor of Business Law,
      University of Florida, Gainesville, FL.........................    19
    Yelowitz, Dr. Aaron, Professor of Economics, University of
      Kentucky, Senior Fellow, Cato Institute, Lexington, KY.........    31
    Stapf, Ms. Leanne, Chief Operating Officer, The Cleaning
      Authority, Columbia, MD........................................    40
    Tipton, Mr. Bryan, Owner, Tipton Investments, Nicholasville, KY..    52

              Alphabetical Listing and Appendix Material Submitted

    American Association of Franchisees and Dealers
        Letter dated March 11, 2022..................................    66
    American Hotel and Lodging Association
        Letter dated March 14, 2022..................................    68
    Asian American Hotel Owners Association
        Letter dated March 10, 2022..................................    69
    Cardin, Hon. Benjamin L.
        Opening statement............................................     1
    Clark, Patrick
        Bloomberg article dated May 14, 2015 ``Franchise Loans Keep
          Blowing Up, and the Government Keeps Backing Them''........    70
    Coalition of Franchisees Association
        Letter dated March 15, 2022..................................    74
    Cortez Masto, Catherine, United States Senate
        Testimony....................................................    14
        Prepared statement...........................................    16
        Report dated April 2021 ``Strategies to Improve the Franchise
          Model: Preventing Unfair and Deceptive Franchise
          Practices''................................................    75
        Letter dated April 13, 2021..................................   162
    Cortez Masto, Catherine, United States Senate and Warren,
      Elizabeth, United States Senate
        Letter dated March 1, 2022...................................   164
    Dental Fix RX
        Letter dated March 13, 2022..................................   168
    Emerson, Mr. Robert W.
        Testimony....................................................    19
        Prepared statement...........................................    21
        Responses to questions submitted by Chairman Cardin and
          Senator Marshall...........................................   207
    Franchisee Advocacy Consulting
        Letter dated March 24, 2022..................................   181
    Galatte, Michael
        Statement dated March 6, 2022................................   191
    International Franchise Association
        Statement dated March 16, 2022...............................     4
    Malik, Junaid
        Letter dated March 14, 2022..................................   193
    Maze, Jonathan
        Restaurant Business article dated February 10, 2022
          ``Burgerim's Growth Had a Notable Enabler: the SBA''.......   194
    North American Securities Administrators Association, Inc.
        Letter dated March 14, 2022..................................    11
    Paul, Hon. Rand
        Opening statement............................................     2
    Stapf, Ms. Leanne
        Testimony....................................................    40
        Prepared statement...........................................    42
        Responses to questions submitted by Chairman Cardin and
          Senators Inhofe, Young and Marshall........................   202
    Tipton, Mr. Bryan
        Testimony....................................................
        Prepared statement...........................................    54
    Yelowitz, Dr. Aaron
        Testimony....................................................    31
        Prepared statement...........................................    33
        Responses to questions submitted by Senator Young and Senator
          Marshall...................................................   199

                          SMALL BUSINESS FRANCHISING:

                          AN OVERVIEW OF THE INDUSTRY,

                     SBA'S ROLE, AND LEGISLATIVE PROPOSALS

                                  ----------

                           WEDNESDAY, MARCH 16, 2022

                          United States Senate,
                            Committee on Small Business
                                          and Entrepreneurship,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:32 p.m., via
    WebEx in Room 301, Russell Senate Office Building, Hon.
    Benjamin L. Cardin, Chairman of the Committee, presiding.
        Present: Senators Cardin, Cantwell, Booker, Rosen,
    Hickenlooper, Paul, Scott, Ernst, Young, Hawley, and Marshall.

    OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, CHAIRMAN, A U.S.
                         SENATOR FROM MARYLAND

        Chairman Cardin. The Small Business and Entrepreneurship
    Committee will come to order.
        I want to welcome all of our witnesses that are with us
    today as we take up the franchising business model. I
    particularly want to welcome our colleague, Senator Catherine
    Cortez Masto, to the Committee. We will hear from her shortly.
        Today's hearing will examine the franchising business
    model, the small business it creates, the role of the Small
    Business Administration in helping entrepreneurs open
    franchises, as well as the Agency's role in protecting
    entrepreneurs from deceptive marketing and bad actors. I also
    want to thank Senator Cortez Masto for joining us today to
    discuss legislation that she has proposed to improve how the
    SBA supports franchisees.
        The most common franchise business model is when a
    franchisor, usually a large or growing corporation, provides a
    business system, training, products, and branding to a
    franchisee, usually an entrepreneur or an established small
    business, in exchange for a fee and ongoing royalties. The
    business model is well known and is practiced by some of the
    largest companies in the world, including McDonald's, Subway,
    and UPS Store.
        When done well, the franchising business model is
    beneficial for the franchisor, the franchisee, and consumers.
    Franchisors are able to create efficient and cost effective
    supply chains while leaving day-to-day operations to the
    franchisee.
        The franchising business model can also be used to fuel the
    expansion of growing businesses. The franchisee is able to skip
    the startup phase of a small business, such as conducting
    market research and product development, by buying an
    established brand and concept. The franchisee is also able to
    focus on the daily operations of the business while leaving the
    marketing, advertising, and supply chain management to the
    franchisor. The consumer gets predictability and guaranteed
    quality in the products and services they purchase at locations
    around the world.
        The benefits of the franchising model are many, but the
    model has its risks, with the disproportionate amount falling
    on the franchisee. For example, the franchisor is in control of
    all relevant information a franchisee needs to access the
    historical performance and financial strength of the franchise
    to make informed decisions. This information asymmetry inherent
    in the relationship can lead itself to bad actors.
        Recently, I think it was last--a few months ago, Senator
    Cortez Masto released a report detailing issues in the
    franchise industry and recommendations for transparency and
    outcomes for franchisees. As a result, she introduced two
    bills, S. 1120 and S. 2162. The Small Business Administration
    Franchise Loan Transparency Act would require the prospective
    franchise owner to receive accurate historical revenue and
    store closure information. And the second bill, the SBA
    Franchise Loan Default Disclosure Act, requires the Small
    Business Administration to publish default rates for the past
    decade for each of the franchise brands.
        Senator Cortez Masto, we look forward to hearing your
    explanation of these bills and what brought you to these
    conclusions, and our Committee is very much looking forward to
    hearing from you in regards to that legislation.
        I also want to welcome the other witnesses that we have on
    the second panel. I think this can be an extremely important
    hearing. For many small business owners, franchising has been a
    path to the middle class and financial security. For many
    others, opening a franchise has led to a financial ruin. So I
    am hopeful to learn from all the witnesses about what Congress
    can do to maintain and improve this successful business model
    while increasing transparency and protect entrepreneurs chasing
    the American dream from bad actors and fraudsters.
        With that, let me turn it over to Senator Paul for his
    opening comments.

       OPENING STATEMENT OF HON. RAND PAUL, A U.S. SENATOR FROM
                                KENTUCKY

        Senator Paul. After borrowing nearly $6 trillion in the
    last 2 years, is any serious person the least bit surprised
    that inflation has reached a 40-year high, that gas prices are
    higher than they have ever been, and that supply chain
    disruptions persist?
        You might think that government would change course. You
    might think that Congress would consider balancing its budget
    and lowering taxes or repealing burdensome regulations. You
    might even think that Congress would at least rule out adding
    more regulatory burdens on small business owners. But you would
    be wrong. Not one of those things are under consideration
    today. Instead, demonstrating a remarkable lack of creativity,
    the legislation under consideration today proposes to solve a
    problem by spending and regulation with even more spending and
    regulation.
        Unsurprisingly, small business owners believe the economy
    is on the wrong track. The Job Creator Network's monthly Small
    Business Optimism Index found that small businesses have grown
    increasingly pessimistic, increasingly pessimistic every month
    since July 2021. I am sorry to say that they are not going to
    feel any better after this hearing.
        Today, this Committee focuses on threatening the franchise
    model, which has often been credited as a business model that
    spurs job creation, in fact, one of the more successful
    business models we have. If our goal is to create an
    environment where small businesses can thrive, our focus should
    be cutting regulations and barriers to entry. Rather, we are
    discussing ways to weaken a business model that has been
    benefiting customers, workers, and entrepreneurs alike across
    the country, with a great history.
        The legislation being discussed today would add more
    regulations to franchises seeking to obtain SBA loans. The
    International Franchise Association has stated that these bills
    attempt to address a problem that does not exist in
    franchising. Franchisee satisfaction is at an all-time high
    coming out of the pandemic thanks to the strength of the
    business model. Adding new government regulations and new
    government mandates to franchises will, while excluding other
    types of businesses, arbitrarily pick winners and losers.
        I ask for unanimous consent to enter the full statement by
    the IFA into the record.
        Chairman Cardin. Without objection.
        [The information referred to follows:]

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        Senator Paul. In reality, no amount of regulations and
    disclosures will eliminate the risk in SBA's programs. The best
    way to avoid risk to taxpayers is to stop forcing them to foot
    the bill for SBA grants and defaulted loans. As Dr. Yelowitz
    stated in his written testimony, the SBA's guaranteed lending
    program cost the taxpayer $25,000 per job. Another report from
    MIT found that the PPP program cost the taxpayer $224,000 per
    job saved.
        Rather than tweaking inefficient and bureaucratic SBA
    programs, I urge my colleagues to, for once, consider getting
    out of the way and letting small business flourish. Thank you.
        Chairman Cardin. Before turning to Senator Cortez Masto, I
    would ask consent that statements from the North American
    Security Administrators Association and the International
    Franchise Association be made part of our record. Without
    objection.
        [The information referred to follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Cardin. Senator Cortez Masto, I already mentioned
    the work that you did leading up to the introduction of these
    two bills. We thank you for your leadership on this issue and
    so many other issues, and it is a real pleasure to have you
    before the Committee.

     STATEMENT OF HON. CATHERINE CORTEZ MASTO, A U.S. SENATOR FROM
                                 NEVADA

        Senator Cortez Masto. Chairman Cardin, thank you; Ranking
    Member Paul and to the distinguished members of the Committee,
    thank you, for the invitation today to testify about the role
    the Small Business Administration can play in protecting
    franchisee borrowers from harmful practices in the franchise
    industry.
        There are terrific franchise corporations out there that
    provide opportunities for entrepreneurs to own successful
    businesses, but there are also franchise corporations that
    treat entrepreneurs incredibly unfairly. Last year, I released
    a report detailing how the franchise system has left some
    entrepreneurs financially devastated. I have heard from
    Nevadans who have lost their retirement funds, their life
    savings, and their homes trying to repay loans on unprofitable
    businesses.
        Our small business owners do not expect their businesses to
    be risk-free, but if they purchase a franchise they absolutely
    deserve to know what they are getting into. Right now, that is
    not always the case, and the Small Business Administration can
    do more to fix it.
        The SBA is the go-to source of funding for many new
    franchises. My report indicates that franchise loans make up 13
    percent of SBA's total loan portfolio. In 2019 alone, SBA
    guaranteed more than 7,000 loans to franchise owners. Yet, some
    franchise brands consistently see high default rates, and the
    SBA Inspector General has repeatedly raised concerns about
    these high-risk franchises.
        This is why it matters. If a franchise owner gets an SBA
    loan for a franchise business that is unprofitable, the
    franchise owner will oftentimes have to repay the loan from
    personal assets. That is their savings, their retirement funds,
    and their homes. If those assets are not enough, the SBA then
    pays off the loan. This is the guarantee that SBA provides
    lenders that loan to franchise owners. Those repaid funds are
    paid for by other small borrowers and sometimes taxpayers.
        I recommend that the SBA require franchise corporations to
    share historical financial performance data with the potential
    franchise owners before the SBA guarantees the loan. It is a
    simple step that could help investors avoid devastating
    defaults.
        Now I have introduced, as the Chairman said, two bills that
    ensure franchisee borrowers have access to critical historical
    financial information that they need before they make a
    decision to move forward. The SBA Franchise Loan Default
    Disclosure Act requires the SBA to publish default rates by
    franchise brand over the past decade. Every lender reports to
    the SBA monthly on loan performance. The SBA can easily make
    default rates on loans it guarantees publically accessible on
    its website. Publishing defaults by brand gives entrepreneurs
    information about the risks that they might face.
        The second bill I introduced, the SBA Franchise Loan
    Transparency Act, requires franchise corporations to give
    accurate historical financial performance information to anyone
    applying for SBA government-backed loans. Now when I talk with
    franchise owners, they repeatedly tell me that they did the
    research before investing. Yet, prospective franchise owners
    are not getting all of the historical financial performance
    data that they need to make a decision. Any information they
    get in the franchise disclosure document is required by law to
    be accurate, but because some franchise corporations know that
    everything in the FDD has to be accurate they can leave out key
    pieces of financial performance information. Instead, they may
    give that information to franchise owners outside the FDD, and
    they can present it an overly rosy or an inaccurate way. So my
    bill requires the franchise corporations to provide specific
    historical performance data in the FDD so that borrowers can
    make an informed decision about the risks that they face.
        People buy franchises because they want to invest in a
    business that has proven successful. You are going to hear that
    today from one of your panelists. Only brands willing to share
    revenue data on how their franchises have performed in the past
    should earn the privilege of having their investors receive SBA
    guaranteed loans. In that sense, my bills sets a standard for
    franchise corporations.
        Now although I have introduced bills to make these changes,
    let me make it very clear that the Small Business
    Administration has the power to take these steps on its own.
    And so while franchises are wonderful business opportunities
    for hardworking Nevadans and they are wonderful business
    opportunities across the country, we need to do more to ensure
    that all franchise owners have that experience. The SBA should
    not be guaranteeing high risk loans.
        So I want to thank the Committee for taking this subject
    up. I look forward to working with the various members of the
    Committee and the Chair and Ranking Member and thank you again
    for holding this hearing.
        [The prepared statement of Senator Cortez Masto follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Cardin. Well, Senator, thank you for your work on
    this area and also for your testimony here today. It is hard to
    generalize. I agree that franchises are an extremely important
    part of entrepreneurship and it has been a very successful
    model, business model. It seems to me that the requirements in
    your two bills--if we were to categorize those franchises that
    have been most successful, they comply with those requirements.
    They are already making that information available to potential
    franchisees.
        So it seems to me what your bill is doing is establishing
    best practices in the field in an effort to make sure that the
    concept of franchising maintains a standard that will allow it
    to grow in the future. So I applaud you and the legislation.
        Are there any questions by members of the Committee for
    Senator Cortez Masto?
        [No audible response.]
        Chairman Cardin. If not, thank you very much for your
    testimony. Appreciate it.
        Senator Cortez Masto. Thank you.
        Chairman Cardin. We will now go to our second panel. We
    have testifying virtually, Professor Robert Emerson, and he is
    the Huber Hurst Professor of Business Law at the University of
    Florida. He has authored several business law textbooks and
    written several dozen law journal articles, book chapters, and
    other works on franchise law. He has led research symposia on
    franchising and taught franchise and distribution law at
    universities and institutions throughout North America and
    Europe.
        We will then hear from Aaron Yelowitz. Dr. Aaron Yelowitz
    is a professor in the Department of Economics at the University
    of Kentucky, a senior fellow with the Cato Institute, and a
    research fellow with the Institute of Labor Economics. He has
    taught graduate classes in public economics and health
    economics and undergraduate classes on health economics, labor
    economics, housing economics, and poverty and welfare programs.
        We will then hear from Leanne Stapf, Chief Operating
    Officer of The Cleaning Authority, Columbia, Maryland. Leanne
    Stapf has been the Chief Operating Officer of The Cleaning
    Authority since 2012, working to build and enhance the
    infrastructure to support franchisees. She is also a franchisee
    of a location of The Cleaning Authority in Harrisburg,
    Pennsylvania. The company's franchises provide regular cleaning
    services to over 100,000 customers.
        Now lastly, we will hear from Mr. Bryan Tipton, owner of
    Tipton Investments in Nicholasville, Kentucky. He has been an
    Arby's franchisee since 2008 and also owns a residential rental
    company. Mr. Tipton works in the operations of his restaurant.
    Mr. Tipton grew up in Richmond, Kentucky, working in the fast
    food industry and attended Eastern Kentucky University before
    pursuing restaurant management.
        We will start first with Professor Emerson, virtually.
        I would ask each of you to--your full statements will be
    made part of our record. If you could summarize in about five
    minutes, we would appreciate that.
        Professor Emerson.

       STATEMENT OF ROBERT W. EMERSON, HUBER HURST PROFESSOR OF
          BUSINESS LAW, UNIVERSITY OF FLORIDA, GAINESVILLE, FL

        Mr. Emerson. Thank you. Chairman Cardin, Ranking Member
    Paul, distinguished Committee members, I am honored to be
    invited to this hearing. I grew up not far from the Capitol in
    Silver Spring and wish I could be there in person.
        This morning, I watched the incredibly moving speech before
    Congress of President Zelenskyy, and I will be the first person
    to acknowledge that my thoughts on franchising obviously do not
    matter much compared to something as epic as that. Still, as I
    thought about Ukraine's heroic fight for freedom and democracy,
    I thought of how franchising is a kind of marketplace
    democracy.
        As a model for business based on free choice, good
    governance, transparency, and a certain measure of democratic
    norms, much should be expected of franchising, and the best run
    franchisors generally do quite well, yet not at the expense of
    franchisees. They are really all in it together.
        Many franchisees have benefited very much from becoming
    part of a franchise network family, but other franchisees have
    been hurt tremendously. To some degree, these franchisees can,
    and no doubt often do, blame themselves for not steering away
    from what turned out to be a fateful choice to purchase a
    franchise, but those mistakes are so predictable. Just as we do
    not know who exactly will be injured due to poor designs or
    manufacturing but we can predict that there will be significant
    numbers who are injured, so we can look at how some franchise
    systems operate and how some franchise prospects will proceed,
    and it all so predictable that people will be hurt.
        So there are norms in that franchisees should have a number
    of freedoms that a written term in a FDD or a franchise
    agreement cannot deny, freedoms such as to go to court to
    assert a claim based directly on the FTC rule, to freely
    associate and exchange information with other franchisees
    without any fear of retaliation, to be able to introduce in
    court the statements made to them by franchisor representatives
    despite a parol evidence rule or waivers or nonreliance
    defenses.
        A norm of good franchise system governance should be that
    franchisors are bound by the reasonable expectations of all the
    parties concerned, including franchisees, whenever operations
    manuals may be used or require expensive changes to the system.
        Perhaps most of all, and this is really more on regulators
    and the franchising community as a whole, the mountain of
    information that is available to prospective franchisees needs
    to be more readily accessible, in a highly useful format, for
    easy tabulation and comparison of FDD data from various
    franchisors or even across industries.
        In my research, I have gathered hundreds of FDDs and put
    them in somewhat surgical files for my use. But when you need
    to put in time to do that, well, it really does help to have
    tenure. Prospective franchisees do not have that time and may
    understandably feel as if they are being hosed down by a fire
    hydrant of documents, disclosures, and disclaimers. Exhaustion,
    information overload may lead them to decide to abstain from
    some choices that they really should make.
        So I do endorse S. 1120 and certainly agree with the
    motives behind S. 2162, but the FTC, the SBA, the NASAA, the
    IFA, and probably some other acronyms certainly could work to
    make the data much more user-friendly. That would be good for
    everyone.
        The data out there is really a set of collective
    experiences, and when we look at those experiences, you could
    say that franchise systems are all feeding off of experience,
    what a franchise network builds upon. There is always more for
    us to learn, and thus, I hope I am one person for whom the old
    quip does not apply: You can always tell a Harvard man, but you
    cannot tell him much.
        [The prepared statement of Mr. Emerson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Cardin. Professor, thank you for your testimony.
    We appreciate it very much.
        Dr. Yelowitz.

      STATEMENT OF AARON YELOWITZ, Ph.D., PROFESSOR OF ECONOMICS,
        UNIVERSITY OF KENTUCKY, SENIOR FELLOW, CATO INSTITUTE,
                             LEXINGTON, KY

        Dr. Yelowitz. Chairman Cardin, Ranking Member Paul, and
    members of the Committee, thank you for the honor of
    participating in today's hearing. My name is Aaron Yelowitz,
    and I serve as a Professor of Economics at University of
    Kentucky and a Senior Fellow at Cato Institute.
        The franchising model, which allows aspiring entrepreneurs
    to adopt a proven business model while avoiding many of the
    mistakes associated with a new business, impacts 730,000
    establishments and 8.4 million workers in the United States.
    Although many people associate franchising with fast food,
    there are thousands of brands across 300 business lines.
        From entry into markets to jobs and wages to the use of SBA
    loans, emerging evidence shows that the conditions franchisees
    operate under are not substantively different than small,
    independent business owners. Singling out franchising for
    additional regulation will make the franchising model less
    viable, in turn, leading to less competition and higher
    consumer prices at a time when inflation is already at 40-year
    highs. The degree to which the Federal Government should be
    involved in regulating private businesses and subsidizing
    business loans is a legitimate question, especially with high
    taxpayer costs per jobs created, but singling out franchises is
    unwarranted.
        Proposals to further regulate franchise disclosure that are
    solely confined to the SBA are misplaced. Franchise sales and
    disclosure is heavily regulated by the FTC, which administers
    the FTC Franchise Rule requiring disclosure in 23 areas.
        Given the paucity of data on franchising, Oxford Economics
    surveyed more than 4,000 franchisees and published a
    comprehensive study in 2021. Oxford found franchising offers a
    path to entrepreneurship but is especially valuable for new
    entrepreneurs, veterans, minorities, and women.
        Some popular books describe franchising as running a
    business with training wheels. Franchisors provide training
    wheels to keep new franchisees balanced until they can pedal on
    their own. This view is confirmed in the study. Thirty-two
    percent of respondents report they would not own a business
    without the franchising model. Without this model, 223,000
    establishments employing some 1.8 million workers would not
    exist. Franchisees value the franchisors' support in areas
    where an entrepreneur running a small, independent business
    would likely make mistakes. Intuitively, many business owners
    would not have gone down that uncertain path without such
    support.
        Critics of franchising often focus on the wages and labor
    violations. Oxford compared wage levels and growth for new
    hires at franchises and independent businesses. Wages and wage
    growth were virtually the same for new hires with no more than
    a 13-cent difference in any of the first 20 months of
    employment.
        SBA loans account for about 1 percent of all small business
    loans. A recent study links SBA loans to businesses. The loans
    did encourage job growth. However, the taxpayer costs from
    charge-offs in administration range from $21,580 to $25,450 per
    job created while the jobs themselves paid about $30,000 per
    year on average.
        Business lending is important to franchisees. The Oxford
    study finds that 21 percent of respondents report being capital
    constrained when starting their first franchise business.
        Critics have expressed concern about default rates. I have
    analyzed SBA loans from fiscal year 2010 onward based on
    franchise status, essentially a comparison of franchisees and
    independent businesses. Among 7(a) and 504 loans, about 10
    percent went to franchisees. As time lapses from when a loan
    originates, charge-off rates increase although the charge-off
    rate for 2020 through 2022 may be misleading because of debt
    relief forbearance from the CARES Act.
        In my view, there are very modest differences in charge-
    offs. In most years, the difference in charge-offs between
    franchisees and independent businesses is statistically
    insignificant. For example, in fiscal year 2010, 7.8 percent of
    franchisees' SBA 7(a) loans were charged-off, slightly lower
    than the 8 percent for independent businesses. For the 504 loan
    program, charge-offs were nearly the same after 2011. The SBA
    data does not support the characterization of franchise loan
    charge-offs as anything out of the ordinary. Rather than being
    squeezed by corporate franchisors to commit wage violations or
    default on loans, the data paints a picture of franchisees
    performing much like small, independent businesses.
        Small businesses promote competition. Some recent proposals
    would impose new burdens on the franchisor-franchisee
    relationship, which is private and voluntary. The proposed PRO
    Act will codify an expanded joint employer standard. The so
    called ``ABC test'' in the PRO Act could potentially classify
    franchisees as employees of their brand instead of small
    businesses, which in reality they are. Both provisions would
    ultimately lead to fewer franchise establishments in the
    marketplace. Such proposals that interfere with the existing
    franchisor-franchisee relationship run the risk of raising
    consumer prices even further.
        Thank you.
        [The prepared statement of Dr. Yelowitz follows:]

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        Chairman Cardin. Thank you very much for your testimony.
        Leanne Stapf.

        STATEMENT OF LEANNE STAPF, CHIEF OPERATING OFFICER, THE
                    CLEANING AUTHORITY, COLUMBIA, MD

        Ms. Stapf. Chairman Cardin, Ranking Member Paul, and
    distinguished members of the Committee, my name is Leanne
    Stapf, and I serve as Chief Operating Officer and franchise
    owner of The Cleaning Authority, and I live in Columbia,
    Maryland. Thank you so much for this invitation. I am really
    jazzed to be here.
        I am both a franchisor and a franchisee, and I appear
    before you today on behalf of the International Franchise
    Association. In our view, at this stage of the economic
    recovery, the state of franchising has never been stronger.
    While our businesses need more workers, today franchisee
    satisfaction has never been higher. According to Franchise
    Business Review, 88 percent of franchise owners say they enjoy
    operating their business. Franchises have led the economic
    recovery with the highest growth rate since we have been
    tracking the data, reaching nearly 775,000 total franchise
    establishments in 2021 and achieving an astounding 16.3 percent
    growth in output.
        Mr. Chairman, franchising remains the ultimate hybrid
    business model between standalone small businesses and big
    corporations, and this model continues to empower people from
    all backgrounds to achieve their dream of business ownership
    more than any other format in America. I have seen firsthand
    how franchising can change lives and change communities.
    Franchising democratizes business ownership for people of all
    backgrounds. To be clear, I would not own a business if it were
    not for franchising, and according to recent research by Oxford
    Economics, 32 percent of all franchise owners report they would
    not own a business if they were not a franchisee. This
    proportion is even greater among both female owners and owners
    for whom a franchise was their first business. Franchising also
    boasts a higher ownership rate by people of color than among
    non-franchise businesses.
        There are just so many of us that have that entrepreneurial
    spirit but do not necessarily have the expertise to really be
    efficient at all aspects of running the business, and the
    franchise offers us that. That structure, that framework, that
    is going to save us massive amounts of time, money, and
    frustration.
        I came into franchising after starting my career in
    computer programming. I was looking for the next step in my
    career and ready for a lifestyle change that allowed me to be
    with my family more, and I found a job description matching my
    technical expertise that came up for The Cleaning Authority,
    and soon after I was hooked.
        I am so proud of what The Cleaning Authority has
    accomplished for more than 200 communities we operate in.
    Through our TCA Cares--this was a program designed by franchise
    owners and facilitated by the franchisor--we have had 12 food
    drives, collecting over 1 million pounds of food equal to
    894,000 meals to over 600 food banks within our communities.
    Last year, our first coat and outerwear drive, we saw almost
    10,000 articles of clothing donated. We also award ten $1,000
    scholarships each year to employees and their dependents of The
    Cleaning Authority to align with our mission to positively
    impact the quality of life of the people we employ.
        But our story is not unique. The Oxford Economics research
    referenced in the testimony showed that some 65 percent of
    franchise owners gave to local charities and they donated a
    total of $1.5 billion to charities last year. In addition,
    franchise owners purchase significant percentage of their
    inputs from local suppliers, thus contributing to their local
    economies through their supply chains. Without franchise small
    businesses, if franchises were replaced by big corporations on
    Main Street, all of this community investment goes away.
        Chairman Cardin, thank you so much for holding today's
    hearing. I want to close by noting that IFA is very supportive
    of SBA loan programs. These loan programs are essential to
    giving opportunity to those who may not have access to capital.
    IFA is also very supportive of the FTC Franchise Rule, which
    provides the guidelines for the disclosure of the majority of
    data franchise brands provide to empower franchise owners.
        And finally, you might have heard an old saying: If you
    want to go fast, go alone. If you want to go far, go together.
        So I believe America needs to go far, and I believe we need
    to go together. And I believe we can do it by keeping
    franchising alive and well.
        We hope Senators will continue to support the franchise
    businesses in the State, and I would be happy to answer any
    questions you may have. Thank you.
        [The prepared statement of Ms. Stapf follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chairman Cardin. Well, thank you very much for your
    testimony.
        Mr. Tipton.

         STATEMENT OF BRYAN TIPTON, OWNER, TIPTON INVESTMENTS,
                           NICHOLASVILLE, KY

        Mr. Tipton. Chairman Cardin, Ranking Member Paul, and
    members of the Committee, I would like to thank you for having
    me here today for this hearing. My name is Bryan Tipton, and I
    have been in the restaurant and bar business my entire adult
    life. I am now a proud fast food franchisee and I have been for
    many years. I hope that my experience can be of benefit to this
    meeting today.
        I would like to start by saying that when I pursued a
    franchise I knew that before I ever opened the door of a
    restaurant that I would have in my particular brand at least 50
    years of experience at my fingertips. As it turned out, I was
    right. I also knew that I would have buying power and support
    that I would have never had on my own. And as a group, we can
    advertise and promote our company in ways otherwise
    unimaginable.
        Even before the pandemic, the restaurant business has been
    a very tough business. Everyone knows that lately it has been
    even tougher since the pandemic. It is a retail business that
    in most cases is over 16 hours a day with strict regulations,
    health codes from every health department and city and county
    in America. As a franchisee of a large restaurant group, I can
    tell you there is already a lot of oversight, paperwork,
    reporting, et cetera, required to the franchisor, and my
    process with my franchisor was extremely transparent.
        The legislation discussed today seems to be addressing a
    problem that does not exist. I just cannot imagine adding more
    red tape to it and with government regulations and oversight.
    It would only add to the cost of franchising at a time when
    franchising is helping navigate an already difficult business
    environment. I just do not see the need.
        I would also like to mention that in the beginning of the
    pandemic there was a lot of uncertainty. Many, if not all,
    business owners were very scared and unaware of the future,
    especially restaurant businesses. A lot of restaurant owners
    took PPP assistance, but I think now we are seeing terrible
    consequences of this program and a lot of other government
    giveaways, and now what we thought would help is hurting us in
    a big way. I did not take a second PPP or a Restaurant
    Revitalization Grant, and if I had it to do over again, I would
    not have taken PPP.
        Because of these programs, there are record levels of
    inflation and the biggest labor problem in my career.
    Industrywide, in almost everywhere in this country, they have
    seen the same problems since the beginning of the pandemic--
    unemployment due to stimulus. There have been good intentions,
    but I certainly do not think that more government intervention
    is going to fix it now.
        Restaurants have been resilient, and if they are not making
    it now, there is likely other reasons for it. Additional grant
    funding or government-backed loans will only further the
    inflation problem. The government needs to get out of the way
    of business owners.
        At the same time, the taxpayers taking on risky business
    loans is not an answer either. Most small business owners'
    needs, including my own, can be met in the private lending
    market. More red tape to navigate, on the other hand, is the
    last thing that my business or any other small business needs
    right now.
        Thank you.
        [The prepared statement of Mr. Tipton follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator Paul [presiding]. Thank you all on the panel for
    your testimony.
        Professor Yelowitz, President Biden and others have argued
    that corporate greed causes inflation. Biden quotes 17
    economists to also argue that Build Back Better, a couple
    trillion dollars' worth of deficit spending, will reduce
    inflation. Speaker Pelosi recently blames inflation on low
    unemployment. I was wondering if you could give us a little
    review, a little Economics 101, on what actually causes
    inflation.
        Dr. Yelowitz. Well, I am not a macroeconomist, so I will
    say that off the bat. But basically, when supply and demand are
    out of whack, then prices will adjust. And in the labor market,
    for example, we see a worker shortage, wages are rising,
    businesses are competing for workers, yet not being able to get
    them even without, for example, higher minimum wages. And so in
    a sense, prices adjust. They are a market signal that basically
    says something about scarcity, and that is likely what is going
    on now. We just have all sorts of interruptions in the economy,
    and that probably is what is causing the higher prices that we
    are seeing.
        Senator Paul. Do you think deficit spending, increasing
    deficit spending, makes inflation less or more?
        Dr. Yelowitz. It certainly would increase it.
        Senator Paul. Mr. Tipton, we have been talking some about
    business loans, government involvement, but there are many
    other factors of life and what government either does to you,
    for you, or against you that affects how your business--how
    well your business succeeds. In 2017, we passed a tax
    reduction, letting business owners keep more of what they
    earned. Did you see any effect in your business? Did the tax
    rates allow you to expand any in your business?
        Mr. Tipton. Yes. Obviously, when there is more going in the
    pocket of the business owner, they have more capital to grow
    and spend. In my company, we enjoyed that benefit then.
        Senator Paul. I have no further questions. I thought
    somebody just came in, but, no. We will wait for one moment,
    and the Chairman will be back, and we will have some more
    questions in just a moment.
        [Pause.]
        Senator Paul. While we are waiting, I do have another
    question for Mr. Tipton. Your experience as a franchisee and
    dealing with a franchise, you know, with a parent company--do
    you see it in your experience as being adversarial, or do you
    see that your interests are aligned between the franchisee and
    the franchisor, or do you see it as a relationship that works
    or a relationship that needs the government to be involved in a
    bigger way?
        Mr. Tipton. Well, certainly do not need the government
    involved. My process with my franchisor was very transparent,
    and the relationship is very good. It was good then, and it is
    good now and always has been. I have been through the process
    with more than one national brand, and it was the same. It was
    very good, very transparent. As a matter of fact, both were so
    transparent that there was a lot, a lot of information, a lot,
    a lot to take in. Nothing was left out.
        Senator Paul. So I guess you get the benefits of the name
    of the restaurant chain that drives customers in. You get
    benefits of cheaper cost of goods. I guess you get food and
    supplies for the restaurants come through a purchasing
    agreement with the parent company. Is there also availability
    of credit through the company as well as far as borrowing?
        Mr. Tipton. I am not sure. I have never used the company
    for financing. I have always--that has always been done in
    private banking industry. And if--in my opinion, if you are
    doing the right stuff, that is not going to a problem.
        Senator Paul. So you did not utilize small business loans
    in starting yours? You utilized just the private banks and
    banking system?
        Mr. Tipton. No. And I do not understand why--I do not
    understand why you would. If you are doing the right thing, the
    private banking industry is going to be there.
        Senator Paul. Well, the difference also is that there is a
    feedback loop. If you borrow from government and government
    puts out a thousand bad loans, who is going to replace the
    people in government and say they are not doing a good job?
        If you live in Richmond, Kentucky, and your bank does a
    thousand bad loans, my guess is that way before you get to a
    thousand somebody loses their job or the bank goes out of
    business or you have to have, you know, some sort of feedback
    loop.
        And this is essentially the difference between government
    and private sector and one reason why many of us will argue
    that the private sector, unless it absolutely is not working,
    that we should really try to do almost everything within the
    private sector because you have that feedback loop that breeds
    excellence, and that is basically the profit motive.
        Mr. Tipton. I would also say that if you cannot get
    financing through the private sector and you need to go to SBA,
    then you are not--obviously, you are not doing something right
    anyway.
        Senator Paul. Thank you.
        Senator Ernst.
        Senator Ernst. Thank you, Mr. Chair, and thanks for the
    witnesses for coming in front of us today for this hearing.
        The franchising model system has provided so many with the
    opportunity to independently run a small business. We see this
    all across Iowa, and as part of my 99-county tour, I have heard
    from many of those franchise owners throughout my State. These
    franchising opportunities are providing entrepreneurs with a
    proven business model, a recognizable brand that offers a
    built-in customer base, and the potential for fast growth.
        In Iowa, franchises contribute $4.1 billion to the economy
    and over 95,400 jobs. These small businesses, like all other
    small businesses throughout the country, are vital to the
    economy. That is why I am so excited to have the opportunity
    today to discuss the role that the SBA, the Small Business
    Administration, plays in small business franchising as a whole.
        So if we could start with you, Dr. Yelowitz, I appreciate
    you coming in today to discuss these small business franchises.
    In your testimony, you had mentioned that SBA loans were a
    strong contributor to job growth by providing access to capital
    for our small businesses. How can SBA lending programs be
    better utilized for job creation and wage growth, especially in
    the areas like mine, our very rural areas?
        Dr. Yelowitz. Basically, SBA loans, the studies that I have
    reviewed show that there is some job growth from those loans.
    On average, around 3 to 3.5 jobs are created per million
    dollars of loan. Those studies do not distinguish between
    franchises versus independent businesses, and so probably my
    biggest take would be to not single out franchises for any
    different kind of regulation than for any other sort of
    business.
        Senator Ernst. No, thank you. We just know how important it
    is to have access to those loans and certainly to promote job
    creation and wage growth.
        Now in your testimony, you also mentioned protecting the
    Protecting the Right to Organize Act or the PRO Act, which
    would codify into law an expanded joint employer standard,
    where franchisers can be held responsible for actions taken by
    their franchisees. You say that this would essentially
    eliminate the entire concept of franchising as a business
    model. Can you talk about the effects that that the joint
    employer standard would have on small businesses and our
    consumers as well?
        Dr. Yelowitz. The PRO Act has several provisions in it, the
    joint employer standard and the so-called ``ABC test,'' which
    will raise the cost of doing business in terms of the
    franchisor-franchisee relationship. If it increases costs, then
    what will likely happen is that there will be fewer franchises
    out there. That, in turn, will lead to less competition. And as
    we know, less competition will lead to price increases in an
    economy where we already have as high of inflation as we have
    seen in 40 years.
        Senator Ernst. Right. Yes, thank you so much. I know it is
    extremely concerning to so many across the State of Iowa and I
    am sure in many other areas as well.
        And, Mr. Tipton, thanks again for appearing in front of us.
    In your testimony, you had mentioned how record levels of
    inflation caused by Federal spending is impacting small
    business supply chains. Inflation has created a hidden value-
    added tax on producers, and the Producer Price Index reached 10
    percent over the last year this month. And can you talk a
    little more about the impact that inflation has had on
    producers and what that means for prices facing our consumers?
        Mr. Tipton. Well, it has affected every part of the
    business, every part of the supply chain. In my brand, we have
    seen increases on every single part of the company, from all
    supplies, everything from fuel cost, extras, you name it.
    Across the board, there has been increases in everything. And
    that has led to across-the-board price increases from the brand
    to the consumer, which we have already implemented one price
    increase just a few weeks ago and will likely see more at this
    rate.
        Senator Ernst. Yes, I would agree. Now for all of our
    witnesses as well, with the cost of doing business for our
    small businesses and our franchisees, do you see this as being
    transitory? And if it is not transitory, at what point do we
    ever bring those costs back down, and how does that happen?
        Mr. Tipton. Well, I do not know if I know the answer to
    that, but I do know that usually, as we all know, when prices
    go up, a lot of times they do not come down. And I am a little
    fearful of that because the inflation numbers that we have seen
    have taken a lot of profit out. You know, we tried to eat a lot
    of this to stay competitive. A lot of fast foods brands were
    trying to do that, but it was just too much. Still had to raise
    prices. And we are still--you know, profit margins are far less
    today than they were this same time last year.
        Senator Ernst. Thank you. Any other panelists?
        Mr. Emerson. Yes, I would like to say I think the costs are
    transitory. I mean, things go up; things go down.
        And I think that some of the concerns about the PRO Act are
    overstated. I think that a lot of the issues arising out of a
    concern about the gig economy are justified, and there are
    questions of how it would actually be implemented to try and
    accommodate the fact that we are in a much different era than
    we were even 10 or 20 years ago. But to reflexively, in effect,
    say this is going to kill franchising is, I think, overblown.
        I believe that a lot of the concern has been generated by,
    of course, what is going on in one or two states and one or two
    provisions, or at least suggested provisions, which may need to
    be tweaked. But to not recognize that the economy is not the
    same and that franchisees are, in some systems--or would-be
    franchisees, depending on how you classify them--are in a
    different position than sort of the old fashioned standard. So
    whether you call them an employee--or in one of my articles I
    talk about them as dependent contractors, not independent
    contractors--can vary.
        A lot of the issue really for the systems on a macro level,
    I think, is that some franchise systems are doing very well,
    their franchisees are doing well because of that and they
    justifiably, as Mr. Tipton clearly is, are proud to be and
    happy to be in a system, but I am concerned that the ones that
    are not doing that well are actually sort of a drag on
    franchising generally. I mean, that is what led to the first
    real legislation in America, in California and other states,
    was the history of problems in the 1960s, early 1970s, with
    people that were basically churning franchises. And I am not
    saying that is happening in most systems, but clearly what
    Senator Cortez Masto was referring to in some franchise network
    systems was such a thing.
        So I do not see how the proposed bills really would
    necessarily have a dramatic impact on a cost. I think a lot of
    the work that is being done to furnish data is already cooked
    into the system and it is just a question of doing it more
    effectively. It is not so much there is too much information.
    There is a lot of information. But it is just that the
    accessibility of it is not that easily available.
        And that is why I use the metaphor of a fire hydrant or
    something just spewing out all this information, but it is not
    really that well organized. And a lot of prospective
    franchisees throw their hands and say, well, I think I feel
    comfortable. And it really should not be like that. They should
    have better access to the information.
        And as I understand it, a lot of franchisors are in favor
    of that. They do not have a problem with that information----
        Senator Ernst. Thank you. I want to offer the opportunity
    to other panelists as well. Thank you.
        Mr. Emerson. Yes, I understand. Thank you.
        Senator Ernst. Yes, please.
        Dr. Yelowitz. One thing that I think will be important to
    emphasize is that you spoke about some of the provisions from
    the PRO Act, which is quite a bit different than information
    disclosure. And what I would point out about information
    disclosure is there are thousands of brands out there that
    compete with each other in terms of providing information, and
    those that are providing transparent products will find more
    takers. So I think the market as a whole, the private market,
    will in a sense solve many of these issues.
        And there might be stories about one of two brands, but
    there are thousands of brands out there. And remembering that
    this regulation does not only affect the one or two brands, or
    several brands, where there are these stories, but all brands
    is something really important to consider.
        And again, your question about joint employer, about the
    ABC test, those sorts of things, feels quite a bit different
    than the information disclosures.
        Senator Ernst. Very good. Thank you.
        Well, I will yield back my time. Thank you very much. Thank
    you, Mr. Chair.
        Chairman Cardin [presiding]. Thank you. As I hope was
    explained, there are votes that are going on. So I went over to
    cast my vote. I am sorry I missed some of your comments. There
    will be a second vote on in about 20 or 25 minutes from now,
    but we are going to try to continue the hearing.
        I just really want to respond briefly to some of the
    comments that have been made in regards to inflation, cost, and
    small businesses. Ms. Stapf, I appreciate your acknowledgment
    in your written testimony as to the importance of the PPP
    program to keep businesses afloat. The PPP program was created
    by bipartisan leadership in the U.S. Congress. I was proud the
    role that the Small Business Committee played, working with
    Senator Rubio, Senator Collins, Senator Shaheen, and myself in
    drafting the Paycheck Protection Program.
        And then in the American Rescue Plan, we fine-tuned it so
    that we could really tailor it to the small businesses that
    needed it the most. And the statistics from 2021 indicate that
    we were able to get to the smaller small businesses, to those
    in underserved communities, that we were able to get to those
    that were so desperate.
        And your observations are similar to the observations that
    I have received in going through my small business community.
    On Small Business Saturday, I was in Annapolis visiting small
    business owners who told me, literally, they would not be open
    today but for the help they got in regards to the small
    business aid programs as a result of the Coronavirus packages.
        So I just want to dispel the concept that what we did to
    help small businesses and keep them alive, keep our economy
    moving, prevent from going into a deep recession is not why we
    have high prices today. High prices are a result of many
    factors, including a supply chain challenge in which one of our
    colleagues, Senator Cantwell, has worked on legislation to
    innovate and manufacture here in America, that we are going to
    be going to conference as a bipartisan bill to try to deal with
    supply chain issues, that will deal with some of our challenges
    on cost as well as some of our workforce challenges, for
    example, the cost of childcare, keeping too many women
    particularly out of the workplace.
        So we have a game plan to deal with the cost centers, but I
    just really do not want to blame the help that we have given to
    small businesses as anything other than helping our economy
    survive the greatest pandemic in a hundred years. And I am
    proud of the work that we did, near unanimous. We had a few
    members of the Senate who disagreed with the program, but by
    and large, this has been a collective effort in order to keep
    our economy moving during the Coronavirus.
        So I want to get back to the franchise issue because I do
    think the franchise model is a critically important model for
    our economy, and I recognize that. I have recognized it from
    the beginning. But it does have certain vulnerabilities because
    of, in cases, the contractual relationship between the
    franchisor and the franchisee.
        So if I might, Professor Emerson, start with your view, you
    said favorable things about the need for certain congressional
    action in order to deal with making information available to
    potential franchisees. Could you elaborate as to where you
    think the greatest priority should be placed in providing
    information to a franchisee? We know that the legislation deals
    with financial information and failures, et cetera, but where
    do you think there is need for more definitive regulation?
        [No audible response.]
        Chairman Cardin. You are on mute, I think, Professor. We
    still cannot hear you.
        Mr. Emerson. Okay.
        Chairman Cardin. We hear you now.
        Mr. Emerson. I am unmuted now?
        Chairman Cardin. Yes, you are Okay.
        Mr. Emerson. I knew that would happen. Now I think that the
    biggest problem, as I have said, really is there is a lot of
    information out there. And a lot of it--I think if franchisees,
    prospective franchisees, put in the time they can get better
    information. But the ability to compare to other franchises
    that they may be looking at, to cross into other industries and
    look at them, to kind of evaluate their costs, not being
    franchised but otherwise investing in some other opportunity,
    is very difficult for them to do because of the way that the
    data is just sort of presented.
        And I think in time this will probably become easier for
    people to handle, but anything that can be done by the FTC, the
    IFA, the SBA or others, or could be facilitated by an act of
    Congress to make that data available would be very useful. I
    think that that is one reason I think S. 1120 could be so
    helpful is what it might provide in terms of the ability to
    give that more data to prospective franchisees.
        A lot of the things I outlined in my written statement are
    more problems substantively, I think, in terms of some of the
    things in a franchise agreement or the procedures for dealing
    with them. And anything at the FTC level or the SBA level that
    could give more information to franchisees about what it is
    they are dealing with would be good. But for now, I do not
    think Congress has really shown that much inclination going
    into substantive mode. If Congress wanted an act on
    franchising, that would be entirely a different matter.
        Chairman Cardin. Thank you.
        Ms. Stapf, you can give us a unique perspective, both as a
    franchisor and a franchisee. So tell us what information is the
    most useful to have available to a potential franchisee in
    deciding whether to move forward with the business opportunity?
        Ms. Stapf. Yes, thanks. Yes, outside of the leadership and
    the history of the brand, I think the Item 19 is obviously very
    important for prospective franchise owners. I also believe that
    Item 19 is the next best place to start because that will allow
    a prospective franchise owner to see the health of the brand,
    openings and closures, and then be able to have full access to
    all of the other franchise owners and then can conduct their
    due diligence. So those are the two areas of the FDD.
        Chairman Cardin. So let me turn to how the SBA can be
    helpful to a franchisee. In what areas do you think the SBA
    could improve its ability to help franchisees in making
    decisions on franchise agreements or to be able to operate as a
    franchisee?
        Ms. Stapf. Yes, so I think that the SBA directory might be
    a good place to start. So this was in conjunction with the IFA
    was formed, and it set criteria with the SBA. And one way that
    we could make--one thing that we can look at is maybe expanding
    that criteria.
        Chairman Cardin. And in regards to the financial tools that
    are available through the SBA, from the numbers we are looking
    at, it looks like there is a pretty active use by franchises of
    the tools at the SBA for financing. Do you have any suggestions
    as to where you think the priorities should be?
        We have the 7(a) program, obviously. We have the smaller
    programs such as the microloan programs. We have the 504
    program and refinancing. Is there a particular challenge that
    you see in any of those tools that we could fine-tune to help
    franchise owners?
        Ms. Stapf. Well, I am honored that you would ask that. So
    just in my personal experience, traditionally a lot of our
    franchise owners use the express loan, and that has been just a
    bit of a challenge from a time perspective. I do not know if it
    is a backlog from PPP loans or what have you or the fact that
    we are a low-dollar loan because we do not have assets. We are
    a service brand. But we find that it is taking a considerable
    amount of time before our franchise owners get funded for their
    express loans.
        Chairman Cardin. We do find a general problem in regards to
    the loan programs at the SBA, that those that are smaller in
    dollar amount generally are not the priority of private
    financial institutions. They like larger loans, generally. They
    can do one loan rather than have to do three for the same
    number of dollars. They would rather just do one loan. So we do
    find a challenge in regards to the smaller amounts of loans,
    for the smaller numbers.
        I take it that in the franchise world you have large
    franchisees and you have small franchisees. So you have
    different ones that qualify for the SBA programs. That is one
    of the reasons why there is under consideration today the
    direct lending program by the SBA so that there would be no
    disadvantaged on the size of the loan that is being requested
    under the 7(a) program. There is also proposals to deal with
    the cost of the 7(a) loans, recognizing that for smaller
    companies that cost issue can become an obstacle for getting a
    loan.
        Your observations seems to indicate that the smaller the
    loan it can be more challenging to get the attention of a
    private bank?
        Ms. Stapf. Certainly, that is my observation. You know, I
    do not have obviously the proof of that, but I do feel that our
    loans are just taking an enormous amount of time where other
    more asset-heavy franchise systems are getting their loans
    quicker. So that would be great for us.
        Chairman Cardin. I would be glad to hear from any of the
    other panelists if you want to make some additional comments.
    We have the time. So, Mr. Tipton, do you want to add anything
    to the discussion.
        Mr. Tipton. Just off of what she just said, I do not know.
    I do not have the numbers or anything either, but maybe the
    loans may take longer because of the fact that they are no-
    asset loans. Maybe the due diligence in that is different. I do
    not know.
        Chairman Cardin. Professor Yelowitz, in regards to
    franchise businesses, are there particular challenges that you
    find in regards to the SBA tools that are available?
        Dr. Yelowitz. I think that Ms. Stapf and Mr. Tipton, being
    business owners themselves, probably are more expert on that.
    So I do not think that that is my wheelhouse.
        Chairman Cardin. Okay. Professor Emerson?
        Mr. Emerson. I would tend to agree with Professor Yelowitz.
        The only thing I would add is my concern--and I cannot
    verify this--is information that is privy to the SBA in terms
    of the guarantee function, or lenders, but not available to the
    franchisee, the prospective franchisee itself, in terms of
    arranging for the loan to be approved. And that strikes me as,
    at least from an angle of equity, problematic. And there is at
    least people that think that that is a problem, certainly when
    you look at what Senator Cortez Masto's office filed. The
    information at least that franchisors are imparting information
    to help sales prospects get a loan but not providing that
    information to the franchisees, under some cloak of
    confidentiality, would be very troubling to me.
        Chairman Cardin. That is an important point. You know, that
    is one of--we are going to be in conversations with the SBA on
    some of these issues and try to work with them. I think much of
    this can be done administratively, as has been pointed out. So
    we will be working directly with the SBA to see whether we
    cannot deal with some of these issues through their practices.
        And I agree with Professor Emerson. There is a lot of
    information out there, but if you are just starting a franchise
    business, you do not have deep pockets. You do not have a lot
    of people on payroll to be able to delve through all this
    information. It has got to be made available in a useful way.
        And it is hard enough now to get through all of the
    requirements to get the loans and everything together to start
    a business. You do not have the resources to try to wade
    through all this information and go through all this challenge
    in order to be able to move forward. We have to find an easier
    way to get this information available to potential franchisees.
    So I think your point is very, very well taken.
        Mr. Tipton. Chairman, I was just going to mention also, it
    was mentioned earlier about disclosure. Beyond--and in my
    experience with my franchisor, beyond all of the disclosure
    statements, we were encouraged to go talk to other franchisees
    all over, everywhere, all over the country. So I just wanted to
    mention that, too, that that was a big benefit in my start.
        Chairman Cardin. I think that is excellent advice. My
    experience is that, again, the successful franchise brands want
    that to take place. That is why they are successful. They want
    to make sure it is the right fit for the franchisee, and
    talking to other franchisees can be extremely helpful to know
    what you are getting into and make sure that is what you really
    want to do. So I think that is really good advice.
        And I am going to agree with many of the panelists that a
    lot of this is just common sense type information we have got
    to get out there to make a decision. It may already be out
    there. It is just hard to find, and we need to facilitate.
        One of the things I have learned about the SBA and where it
    is most valuable and the resource partners that work with small
    businesses is that the more mentoring, the more technical help,
    the more connections that can be made through the SBA services,
    the more successful a young business is going to be. So any
    connections that we can make in that regard, including
    connecting with other franchisees before a potential franchisee
    makes a decision, is going to be helpful. So I appreciate that
    advice.
        Let me thank again all four of our witnesses. This has been
    extremely helpful. We will be following up, and we may be
    contacting you to help us as we go through this field.
        The record will remain open for two weeks.
        And with that, the Committee will stand adjourned, with our
    thanks.
        [Whereupon, at 3:46 p.m., the Committee was adjourned.]

                          APPENDIX MATERIAL SUBMITTED

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