For many aspiring entrepreneurs, franchising has long been heralded as a ladder of opportunity—a chance to own a business while benefiting from the support and brand recognition of an established company. But cracks have emerged in the franchise model’s polished veneer lately. Concerns about unfair or deceptive practices by franchisors have grown louder, with franchisees increasingly raising red flags about transparency and fairness.
Data from the Federal Trade Commission (FTC) underscores the mounting tension. The agency has reported a sharp rise in franchise-related complaints in recent years, prompting it to take a closer look. In 2023, it issued a Request for Information (RIF), inviting stakeholders to weigh in on what’s working in franchising, and what’s not.
Industry players flooded the agency with comments. Overall, a third of respondents advocated for more substantive regulations to govern the franchisor-franchisee relationship. Around 15 percent called for changes to the Franchise Rule, the pre-sale disclosure requirement designed to prevent deception and empower prospective franchisees with vital information. Another 10 percent pushed for stricter enforcement of existing laws, while a quarter supported maintaining the status quo.
Unsurprisingly, franchisees were notably more inclined toward regulatory changes than franchisors. Nearly 75 percent of franchisors supported the status quo, compared to just 40 percent of franchisees.
Among the concerns raised by franchisees were supply restrictions, non-compete clauses, franchise renewal challenges, and unilateral changes to operating manuals. But one issue loomed particularly large: high fees and royalties, including undisclosed or “surprise” charges.
Federal officials heard from franchisees about increasing payment processing and technology fees as well as surprise training, marketing, and property improvement fees that weren’t clearly stated by the franchisor. The FTC called these “undisclosed junk fees,” or expenses that inflate costs and may make a difference in profitability and loss.
“Everyone always says to read your disclosure document because it’ll tell you everything about your business,” says Keith Miller, a Subway franchisee and principal at Franchisee Advocacy Consulting. “But if a franchisor can unilaterally add new fees, what good is disclosure? It’s a waste of time if they have a blank checkbook to add fees whenever they want.”
Even when fees are disclosed, transparency may be lacking, and franchisees may not know how their money is being spent.
“If a brand collects $20 million in technology fees and only spends $12 million, that’s really just eight more million dollars of royalties that aren’t called royalties,” Miller says.
And when fees stack up, the financial strain can escalate quickly.
“It’s dying by 1,000 cuts,” Miller explains. “Somebody will say, ‘We’re only charging you this much a month for technology. That’s insignificant.’ Well, if you have enough insignificance, it adds up to real money over time.”
The impact is most severe for brands with tight margins, where franchisees are barely breaking even.
“Twenty years ago, before this became a bigger issue, I used to joke that if we’re making money, you can ask us to spend $10,000 on something, but if money is tight, you can go to hell,” Miller says. “You’ll put up with more if you’re making lots of money. But for franchisees that I talk to who’ve been in the industry for 20 years or more, they all say that margins are tighter than ever, that they keep shrinking, and they’re making less money.”
In response to these concerns, the FTC released new guidance last summer mandating that franchisors cannot impose fees that were not previously disclosed in franchise agreements. The announcement drew criticism from International Franchise Association (ifa) president and CEO Matthew Haller, who expressed concern that the agency’s actions could stifle innovation and ultimately harm franchisees.
“The FTC’s actions are contrary to the reality that the vast majority of franchise relationships are working and that franchising continues to grow each year,” Haller said in a statement at the time.
He urged the FTC to consider the IFA’s Responsible Franchising policy recommendations, which focus on enhancing transparency and clarifying obligations in franchise agreements. The IFA has been advocating for these updates since the 2023 RIF, emphasizing the need for targeted adjustments rather than sweeping regulatory changes. Last spring, the organization unveiled a set of policy recommendations developed by franchisors, franchisees, and suppliers to improve transparency during the pre-sale process.
Last summer’s FTC guidance reflects a continuation of the agency’s more proactive stance on franchise industry regulation under the Biden administration. Historically, it took a largely hands-off approach, requiring disclosure but rarely enforcing any violations, leaving most oversight to the states. Under former chair Lina Khan, however, the FTC adopted a more assertive position.
The agency’s approach is likely to shift again under the second Trump administration, with recent appointments giving Republicans a three-member majority on the commission.
“The FTC will become much less aggressive, not only in franchising, but in many other things,” Miller predicts. But he also points to a growing movement among franchisees to advocate for their interests. In 2019, when the FTC sought public comments on the Franchise Rule, it received only a few dozen responses. By 2023, during the RIF process, that number had surged into the thousands.
“Even if they try to roll it back, they’ve kind of let the cat out of the cage,” Miller says. “Franchisees are more engaged than ever.”
For franchisors looking to foster growth and minimize disputes, it’s crucial to take input from franchisee associations or advisory councils seriously, he adds.
“Don’t try and use them as a rubber stamp,” Miller says. “Don’t get a bunch of people who agree with everything. I always say, if you want to form a council, find the person who kisses your ass the most, and find the person who’s your biggest pain in the ass, and put them both on it, so you hear everything. It’s about honestly working with a group of franchisees, not creating a hand-picked, five-person council of yes-men.”
Franchisees, for their part, are not necessarily opposed to new fees—if the franchisor provides a solid business case for them.
“You signed a 20-year agreement, but you didn’t have all of these apps 20 or even 10 years ago,” Miller says. “Things change. But the franchisor has to come with the business case to franchisees and get buy-in on it. Come to me and say, ‘We’re going to charge you $100 a month because we need this, we think it’s going to create this much business, or all of our competition is doing this and we’re going to lose this much business if we don’t do it, too.’ Show us the numbers. We’re all business people, after all.”
