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Chapter 3. The Wealth-Creating Power of ... > Franchise Disclosure: An Insight int...

Franchise Disclosure: An Insight into Individual Franchisor Health and Wealth

The franchise relationship is characterized by a high degree of informational asymmetry. This means that the franchisor and the franchisee do not have access to the same knowledge about the strengths and weaknesses of the franchise. The Federal Trade Commission (FTC) does not require franchisors to disclose franchisee earnings, which tends to reinforce the franchisor’s ability to camouflage poor performance and to maintain a financial advantage (higher franchise fees and royalties) far longer than might prevail under more stringent disclosure rules. The FTC argues that a disclosure of average earnings would be as misleading as no disclosure at all, because such a wide range of earnings exists among franchisees that the average is relatively meaningless.[10] Limited disclosure does not benefit all franchisors either, but it generates a “lemons” problem[11] wherein good firms are pooled with bad firms and, unable to attract capital at reasonable rates, progressively disappear from the market. Franchisors can signal their superior quality, however, by building their brand through successful stores. By constructing the franchise concept with the FRM in mind, the franchisor will extract the most efficient system and highest returns and will stand out in the crowd of those who have chosen not to perform such due diligence in the shaping of their opportunity.

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