Image by Mikhail Nivol
Franchise Brokers, Sales Consultants, and Franchise Sales Organizations (FSO’s) play a pivotal role in guiding aspiring franchisees through life-changing financial decisions, yet many operate without mandatory licensing or Errors & Omissions (E&O) insurance. This lack of oversight can lead to compliance risks, ethical concerns, and long-term damage to the franchise industry’s reputation. Discover why raising professional standards is essential for protecting franchisees, franchisors, and the credibility of franchising as a trusted business model.
SHOULD FRANCHISE BROKERS, SALES CONSULTANTS, AND FSOS BE LICENSED AND CARRY E&O INSURANCE?
By Gary Occhiogrosso, Founder and Managing Partner, Franchise Growth Solutions™️
The franchise industry has long been celebrated as a pathway to entrepreneurial success, offering individuals the opportunity to operate a business within a proven framework. However, this path often begins with critical guidance from franchise brokers, sales consultants, and Franchise Sales Organizations (FSOs). These individuals and entities are key in helping potential franchisees evaluate opportunities, navigate complex financial commitments, and determine the best fit for their goals.
Yet, despite their significant influence, there is no universal requirement for these professionals to hold licenses or carry Errors and Omissions (E&O) insurance. This absence of regulation is concerning, given the financial and legal implications of franchising transactions. It’s a gap that, in my experience, exposes aspiring franchisees—and even franchisors—to unnecessary risks.
This article explores why the franchise industry must take proactive steps to professionalize these roles through licensing and mandatory E&O insurance. By raising the bar for compliance and accountability, we can protect franchising’s reputation as a trusted business model while safeguarding the interests of all parties involved.
The Role and Responsibility of Franchise Brokers and Consultants
Franchise brokers and sales consultants act as intermediaries, helping match potential franchisees with the right opportunities. Their work often includes advising on business models, financial obligations, and operational expectations. Essentially, these professionals serve as trusted advisors during one of the most significant financial decisions of a potential franchisee’s life.
However, the absence of a licensing requirement means that virtually anyone can claim to be a franchise broker or consultant. This lack of oversight has allowed unqualified individuals to enter the field, many of whom prioritize their commissions over the long-term success of their clients. Without proper training or accountability, some brokers may fail to fully disclose risks, misrepresent opportunities, or overlook compliance with franchise regulations.
The Pitfalls of Unregulated Franchise Brokers and Consultants & FSOs
Franchise Sales Organizations, or FSOs, Franchise Brokers and Consultants often work on behalf of franchisors to manage the sales process. While some FSOs, Franchise Brokers and Consultants operate with integrity, others focus solely on selling as many territories as possible, often with little regard for the long-term success of the franchisees they recruit.
In my experience, I’ve encountered franchise sellers that tout their commitment to “responsible franchising” while simultaneously prioritizing quantity over quality. This approach can lead to ill-prepared franchisees for business ownership challenges, ultimately damaging both the franchisor’s brand and the franchisee’s livelihood.
Why Licensing and E&O Insurance Are Necessary
Licensing and E & O insurance provide a framework for accountability and professionalism in franchise sales. Here’s how:
- Licensing Standards: Licensing would establish baseline qualifications for franchise brokers, sales consultants, and FSOs. It would ensure they thoroughly understand franchise laws, compliance requirements, and ethical sales practices. Additionally, licensing would create a mechanism for removing individuals who engage in unethical or illegal behavior.
- Errors and Omissions Insurance: E&O insurance serves as a safety net, protecting both franchise professionals and their clients. Suppose a broker or consultant makes a mistake, misrepresentation, or oversight that results in financial loss. In that case, E&O insurance can help cover the damages. This protects franchisees and encourages brokers to operate with greater care and accountability.
California Leads The Way By Taking A Larger Role
Regulatory shifts in franchising are always a hot topic, and California has taken a significant step forward in ensuring transparency and accountability in franchise sales. The state has recognized the concerns raised about the role of franchise sales organizations and brokers and has enacted a law set to take effect next January. This law will require these entities to register and disclose their history and background in a comprehensive document—one that offers deeper insights into their track record and practices.
At the federal level, the FTC is also considering a similar rule, but with the current election cycle in full swing, its future remains uncertain. What does this mean for the franchise industry? It signals an evolving regulatory landscape that franchisors, brokers, and prospective franchisees must carefully navigate. Transparency and compliance will be more critical than ever, and these changes could reshape the way franchises are marketed and sold.
Let’s dive into what this means for the industry, how it impacts franchise growth, and what businesses should do to prepare.
Harold Kestenbaum, Franchise attorney /Of Counsel at Spadea Lignana stated “The state of California has listened. They enacted such a law, which takes effect next January. They will be requiring franchise sales organizations and franchise brokers to register and submit what amounts to a disclosure document. This document provides the history and background of these organizations. It is quite detailed and comprehensive. The FTC is also about to promulgate a similar rule. But with this election cycle, no one knows if this will get passed.”
With California leading the way and the FTC considering similar measures, it’s clear that franchise sales regulations are evolving. Whether this shift ultimately strengthens the industry or creates new challenges will depend on how franchisors, brokers, and sales organizations adapt. Transparency and accountability are becoming non-negotiable in franchise development, and those who embrace these changes proactively will be better positioned for long-term success.
The Bigger Picture: Preserving the Integrity of Franchising
The franchise industry has built a reputation for offering aspiring entrepreneurs a proven path to business ownership. However, that reputation is jeopardized when unqualified or unethical individuals are allowed to operate unchecked. Licensing and E&O insurance are not about creating barriers to entry; they are about safeguarding the credibility of franchising and ensuring that all stakeholders can operate confidently.
As a franchise industry veteran, it troubles me to see the damage caused by irresponsible actors. The industry must take a stand to prevent franchising from sliding into a space where trust is eroded, and opportunities are lost. By implementing licensing and mandatory E&O insurance, we can elevate the professionalism of franchise brokers, sales consultants, and FSOs, ultimately benefiting the entire franchise ecosystem.
My Final Thought
Licensing and E&O insurance are not merely suggestions—they are essential steps to ensure the long-term success and credibility of the franchise industry. By holding brokers, consultants, and FSOs to higher standards, we can protect aspiring franchisees, strengthen franchisors’ brands, and preserve franchising as a trusted business model. It’s time to prioritize responsible franchising and take meaningful action to uphold the industry’s integrity.
Gary Occhiogrosso retains all worldwide copyrights to this article.
Sources:
Franchise Broker Compliance The Internicola Law Firm
Licensing Requirements for Franchise Brokers:
Be A Franchise Broker
Errors and Omissions Insurance
The Hartford
Professional Liability Insurance
Wikipedia
Franchisor Malpractice and Risk Management:
International Franchise Association
FTC’s Guide on Franchise Brokers:
Federal Trade Commission
Errors and Omissions Insurance for Real Estate Professionals The Close
LEARN MORE HERE
This article was researched, outlined and edited with the support of A.I.
