- Franchise Brokers Face Greater Scrutiny: On Sept. 24, 2024, California enacted Senate Bill 919 (SB 919), amending California's Franchise Investment Law to regulate franchise brokers and franchise sales organizations. SB 919 will take effect either one year after appropriation by the California legislature or July 1, 2026, whichever date is later. In May 2024, the Franchise and Business Opportunities Group of the Corporation Finance Section of the North American Securities Administrators Association, Inc. (NASAA) sought public comment on a proposed NASAA Model Franchise Broker Registration Act (Franchise Broker Act). The Franchise Broker Act, if adopted by NASAA, would be a model for states to use to regulate franchise brokers and their representatives by requiring brokers to register and provide disclosure to prospective franchisees. Notably, the Franchise Broker Act is drafted so that it could be used by any state, not just those states that currently regulate the offer and sale of franchises. In 2025, franchisors and their third-party brokers should expect greater scrutiny and more proposed legislation regulating franchise brokers and their representatives.
- Increased Regulatory Uncertainty: The franchise industry faces increased regulatory uncertainty ahead, primarily due to the evolving dynamics surrounding the Federal Trade Commission (FTC) and its Franchise Rule, which is reviewed every decade and was last amended in 2007. Over the past few years, the FTC actively sought input from industry stakeholders, posing general questions about the efficacy of the Franchise Rule and asking specific questions about the nature of relationships between franchisors and franchisees, including confidentiality agreements, non-compete covenants, implementation of systemwide changes, and management of a franchise network's supply chain. On July 12, 2024, the FTC took several significant actions: it released Staff Guidance addressing franchisors' implementation of new fees through operations manual changes, issued a Policy Statement regarding restrictions on franchisees' communications with government officials about potential legal violations, and published an Issue Spotlight detailing major franchisee concerns gathered from industry feedback. While industry observers anticipate future regulatory changes, the exact nature and timing of these changes remain uncertain.
- Restaurant Chain Challenges Expected to
Continue: The restaurant industry is poised for
significant restructuring in 2025, with struggling chains likely to
face increased pressure for consolidation or closure. Market
analysts predict a wave of strategic bankruptcies and acquisitions,
particularly among casual and fast-casual chains targeting middle
and lower-income consumers. This trend is being driven by multiple
persistent challenges: the continued dominance of delivery
platforms reshaping consumer behavior, ongoing labor cost pressures
(especially in states like California with new wage legislation
AB-1228 now in effect), and sustained inflationary impacts on food
and operational costs.
The landscape in 2025 will particularly challenge traditional brick-and-mortar establishments that haven't successfully adapted to the demand for value and the delivery-first mindset of modern consumers. With minimum wage increases taking effect and labor shortages continuing, restaurants will need to either innovate their operational models or risk joining the growing list of chain closures. Industry experts anticipate that successful chains will be those that can effectively balance digital integration, labor costs, and pricing strategies while maintaining customer value perception in an increasingly price-sensitive market. - Continued Consolidation of Franchisees: The franchise industry is expected to experience an increased wave of consolidation of franchised businesses driven by sophisticated investors and private equity firms, an emerging trend over the past several years. This trend will likely reach new heights in 2025 as stabilizing interest rates create favorable conditions for acquisitions of multi-unit franchisees by well-capitalized investors that seek to accumulate efficient, scalable franchise operations. This shift is prompting franchisors to adapt their policies, with many expected to introduce new guidelines specifically designed to accommodate private equity and family office ownership. For individual franchisees, 2025 may present unprecedented exit opportunities, while franchise systems will need to balance the benefits of experienced, well-funded operators against traditional ownership models. This evolution suggests a future where fewer yet larger and more sophisticated operators dominate franchise systems across various sectors.
- Increased Focus on Junk Fees: The issue of junk fees is gaining prominence as regulators and industry groups attempt to enhance transparency and fairness. The FTC released Staff Guidance on franchisors' imposition of new, undisclosed fees on franchisees, and states, such as California, have recently enacted legislation banning "junk fees." Both the FTC and state regulators have begun scrutinizing franchisors for implementing undisclosed fees through unilateral modifications to the operations manual. Franchisors should expect to see growing pressure by regulators to discontinue the practice of introducing fees through modifications to the franchisor's operations manual, as well as a greater number of comments on the issue during the upcoming 2025 FDD renewal season. This shift towards transparency is expected to be a key focus in the evolution of junk fees at both the state and federal level.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
