What Is the Small Business Franchise Act?

The Small Business Franchise Act, or SBFA, was originally introduced in 1998 and later passed in 1999. Proponents of the bill pointed to significant franchisor abuse as the reason for creating the legislation. The SBFA basically put into place certain safeguards to eliminate fraud and other activities designed to exploit franchisee investors. In many ways, the SBFA was introduced in order to give the franchisee additional bargaining power in a relationship where both parties have sizable vested interests.

As John Conyers, Jr., the congressman from Michigan stated, "Protecting the rights of franchisees is ultimately about protecting the rights of small business." Here are some highlights:

• The bill reaffirmed already existing prohibitions. The SBFA served as a reminder that perpetrating a fraud within the franchisor-franchisee relationship was prohibited.
• The bill cleared the way for franchisees to form trade associations. The SBFA made it clear that corporations could not prevent franchisees from creating or joining trade associations. (Indeed, membership in professional organizations is a benefit and can enhance your knowledge of the franchising world.)
• The bill imposed rules of good behavior and good faith. Like any business, not everyone follows the rules in the world of franchising. The SBFA helps small franchisees by requiring all parties — franchisors and franchisees — to act honestly and in good faith with each other and observe reasonable standards of fair dealing in the trade.
• The bill protects the franchise from termination without good cause. Among other allowances, a compulsory 30-day period must be given to the franchisee to cure any defaults.
• The bill promotes free trade following the expiration of a franchise agreement. Once a franchise agreement has expired, a former franchisee can engage in any business at any location but cannot use the franchisor's intellectual property, trademark, or trade secrets.
• The bill imposes limited fiduciary duty on the franchisor. The franchisor owes its franchisees the highest standard of care when handling the small businessperson's money. The SBFA obligates the franchisor to give the franchisees a full disclosure of disbursements and a full accounting of how the money is being used.
• The bill protects the franchisee against unlawful transfer of the business. The prevalence of mergers, acquisitions, and leveraged buyouts makes franchisees particularly vulnerable to unlawful transfers. The SBFA says that franchisees must be given 30 day's notice of the franchisor's transfer of ownership to another entity.
• The bill ensures procedural fairness. In other words, it is unlawful for a franchisor to require any term or condition in the franchise agreement that violates the SBFA. This is an especially important point in that it disallows a franchisor from restricting the benefits inherent in the SBFA.
• The bill allows a state attorney general to step in if necessary. If an attorney general of any state believes that the interests of that state have been or are being threatened or adversely affected because a franchisor has engaged or is engaging in a pattern which violates the SBFA, then the attorney general may bring a civil action on behalf of its residents in an appropriate U.S. District Court. This means that the highest prosecutorial officer of the state can ensure that the SBFA is not being violated.
• The bill gives franchisees the freedom to independently source goods and services. Instead of forcing franchisees to purchase materials from corporate headquarters at an inflated price, the SBFA allows the franchisee to obtain goods and services from sources of the franchisee's choosing, as long as those materials meet reasonable, established, and uniform system-wide quality standards created and enforced by the franchisor.

Read a summary of the SBFA on the American Franchisee Association's Web site.