THE ROLE OF SMALL BUSINESS IN FRANCHISING HEARINGS BEFORE THE SUBCOMMITTEE ON MINORITY SMALL BUSINESS ENTERPRISE AND FRANCHISING OF THE PERMANENT SELECT COMMITTEE ON SMALL BUSINESS HOUSE OF REPRESENTATIVES NINETY-THIRD CONGRESS FIRST SESSION WASHINGTON, D.C., JUNE 20, 21; AND JULY 12, 1973 Printed for the use of the Permanent Select Committee on Small Business CONTENTS Addabbo, Hon. Joseph P., chairman of the Subcommittee on Minority Small Business Enterprise and Franchising: Opening statement__ Armendaris, Alex, Director, Office of Minority Business Enterprise of the Department of Commerce; accompanied by Louise West, pro- gram specialist, franchising, Department of Commerce.. Axelrad, Norman, vice president, public affairs, McDonald's Corp., Bernstein, Joan Z., Acting Director, Bureau of Consumer Protection, Federal Trade Commission; accompanied by Roger Fitzpatrick, counsel on the staff of the Bureau of Consumer Protection___. Brown, Harold, attorney, Boston, Mass- Browning, Bernard S., president, General Business Services, Inc.-. Cerajewski, James D., Dunkin' Donuts franchisee, Hammond, Ind. Esposito, Antonio, Portsmouth, N.H_ Joseph, James H., attorney at law, Pittsburgh, Pa.. Keys, Brady, Jr., president, All-Pro Enterprises, Inc., Pittsburgh, Pa- Kleppe, Thomas S., Administrator, Small Business Administration___ Knebel, John A., General Counsel, Small Business Administration__ McCoy, Neal S., Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission_ Murphy, Thomas H., president, Continental Reports, and publisher, Zeidman, Philip F., Washington counsel, International Franchise Association; accompanied by Jerry H. Opack, executive vice president, International Franchise Association__ Letters, statements, etc., submitted for the record by- 43 138 Armendaris, Alex, Director, Office of Minority Business Enterprise of Bernstein, Joan Z., Acting Director, Bureau of Consumer Protection, Browning, Bernard S., president, General Business Services, Inc.: 76 Cerajewski, James D., Dunkin' Donuts franchisee, Hammond, Ind.: 111 Letter referring to Koscot's entrance fee; complaints and judg- ments against Koscot Interplanetary, Inc., Dare To Be Great, Inc., and Glenn W. Turner_. 163 Prepared statement_ 167 Letters, statements, etc., submitted for the record-Continued Southland Corp.: Prepared statement_ West, Louise, program specialist, franchising, Department of Com- Page 149 179 Marks, Lionel Alan, attorney, New York, N. Y 201 Offen, Neil II., Direct Selling Association, Washington, D.C. 205 198 202 Appendix V.-Statement on Behalf of International Franchise Associa- tion Before Federal Trade Commission Hearing on Proposed Trade Appendix VII.-Attachments to the prepared statement of James D. Cerajewski, Dunkin' Donuts Franchisee, Hammond, Ind. -- Appendix VIII.-Complaint, affidavit, and judgment in the action insti- tuted by the State of New York against Koscot Interplanetary, Inc., Dare To Be Great, Inc., and Glenn W. Turner_. Appendix IX.-Statement of John A. Knebel, General Counsel, Small Business Administration, on Federal Trade Commission proposed trade regulation rule on disclosure requirements and prohibitions concerning THE ROLE OF SMALL BUSINESS IN FRANCHISING WEDNESDAY, JUNE 20, 1973 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MINORITY SMALL BUSINESS ENTERPRISE AND FRANCHISING OF THE PERMANENT SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to notice, at 9:05 a.m., in room 2359, Rayburn House Office Building, Hon. Joseph P. Addabbo (chairman of the subcommittee) presiding. Present: Representatives Addabbo, Corman, Hungate, McCollister, and Stanton. Also present: Howard Greenberg, staff director; Leslie Glick, majority counsel; and James R. Phalen, minority counsel. Mr. ADDABBO. The subcommittee will come to order. This morning the Subcommittee on Minority Small Business Enterprise and Franchising of the House Permanent Select Committee on Small Business will commence hearings on the question of franchising. OPENING STATEMENT OF CHAIRMAN ADDABBO Franchising is a unique partnership between small business and big business. It is a partnership that has been notably successful in terms of our overall economy. During 1973, franchise sales of goods and services are expected to total $156 billion, or about 12 percent of our Nation's estimated gross national product. In the retail market, franchise outlets are expected to account for 30 percent of all retail sales in the United States this year. In this franchise relationship, big business usually supplies the knowhow and marketing expertise while small business supplies the labor and the capital. However, the relationship between the franchisor and the franchisee is not usually one of equals. It is more akin to a parent/child relationship, with numerous obligations and restrictions imposed on the franchisee. While this relationship has generally proven successful, like any relationship it is subject to abuses. Among the foremost problems is the inequality in experience and bargaining power between the franchisor who is selling a franchise and the prospective franchisee who is considering the purchase of one. There are some indications that the franchisee may often make a substantial investment without a full understanding of the risks and obligations he is assuming. Some unethical companies have exploited this situation by promising great financial gains to individuals with little experience and limited capital gains which are often never realized. |