Proposed regulation would cripple franchise owners

Customers order lunches at a bakery in the Napa Valley. (Photo: James Kirkikis, via Shutterstock)

In the entrepreneurial world, California is a hub of innovation. The state is home to roughly four million small businesses which employ more than seven million workers.

Out of the Golden State, franchise businesses from Meineke Car Centers to Kiddie Academy have been conceived and grown into prosperous companies employing thousands and helping countless entrepreneurs achieve success. Not the least of these entrepreneurs are those who serve local communities up and down the state in the franchise restaurant community.

Today, these independent franchise restaurant businesses are under attack. A revived bill, AB 257 (Holden) otherwise known as the Fast Recovery Act, seeks to diminish the role of these small business operators to state-managed functionaries.

The bill will impact the ability of operators and managers to run the business.

While the bill has many flaws, its impact on individuals who strive to run their own business as a franchisee is especially egregious. The Fast Recovery Act needs to be rejected by the California State Senate. Here are five key reasons:

First, the bill will impact the ability for operators and managers to work with employees. In the franchise model, it is imperative the franchise owner builds a winning team. However, under AB 257 the franchisee operators will be relegated to a subordinate role under the authority of the franchisor and a newly formed, appointed statewide committee of 11 commissioners.

What’s more, cities with more than 200,000 residents will be subject to a redundant local committee with similar jurisdiction. Under this structure, franchisees merely serve as an ineffectual go-between for the franchise and the councils while maintaining almost all the business risks. Team building and skills development are little more than an afterthought under AB 257.

Second, the bill will impact the ability of operators and managers to run the business. The political appointed councils will have unprecedented authority to draft and enact workplace rules, free of meaningful oversight by legislators or the governor. Even mundane decisions like which paper towels and cleaning supplies to order are subject to the whims of the appointed committees.

Operators who set the course for the franchise and managers who run day-to-day operations will effectively become obey-following autocrats in their own business.

AB 257 will exact harm on a large segment of restaurant owners including minority and women entrepreneurs

Third, the bill will discourage franchises from being part of the community. Restaurants are an anchor in the community supporting many local civic groups and sports teams. Restaurant owners are highly involved in community events and financially support many non-profit organizations. With less authority over daily operations, franchise owners will be less likely, even discouraged, from participating in the local community.

Fourth, among the biggest risks associated with the bill is the possibility that it will discourage business owners from starting new franchise concepts. Franchises are incubators for other franchises.

In a study by industry group FRANdata of 1,600 new franchise concepts that started over five years, 25% of the founders of these businesses had previously worked in franchising either as a franchisee, employees of franchisees or employees of franchisors.  If AB 257 were to become law, entrepreneurs with a franchise concept would be disincentivized from bringing the franchise forward.

Fifth, AB 257 will exact harm on a large segment of restaurant owners including minority and women entrepreneurs who seek to employ others and earn a living in the restaurant community. Sixty percent of California restaurants are owned by people of color. Restaurant franchises are also well known for providing opportunities to women, the LGBTQ+ community, and new immigrant business owners. This legislation would reverse decades of progress made by minority small business owners who have achieved success in the franchise model.

Overall, AB 257 unfairly targets one type of business and creates a model that will be applied to other California businesses. Franchise owners or not, small businesses are watching this bill with the expectation, if it passes, more California regulation on their own business will soon follow.

In the aftermath of COVID, neighborhood businesses cannot endure more prolonged hardship. For these reasons, AB 257 the Fast Recovery Act should be rejected when it comes before the California Senate.

Editor’s Note: John Kabateck is California state director, National Federation of Independent Business

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