[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
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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:]
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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:]
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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:]
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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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