Introduction
As companies navigate changing legal and regulatory frameworks, the franchising and mergers and acquisitions (M&A) landscapes are changing dramatically. Legality is crucial in determining the expansion and profitability of franchises and mergers in 2025. It's critical to keep up with the most recent legal developments as businesses seek acquisitions and as franchisors grow their networks. It is anticipated that changes in labor legislation, technology, and franchisee rights will reshape how franchise systems function alongside their stakeholders. Similar to this, deal-making methods will be greatly impacted in the M&A sector by regulatory scrutiny, changes to tax laws, and the increasing importance of environmental, social, and governance (ESG) criteria.
Central Points
1. Increased Focus on Franchise Regulation
The Federal Trade Commission (FTC) is an American federal agency that protects consumers and promotes competition in the economy. The original Franchise Rule (16 C.F.R. Part 436), which was established by the FTC in 1979, mandates the publication of certain facts for potential franchisees to make well-informed investment decisions. However, the most recent bout of regulatory action began in March 2023 when the FTC released a request for public feedback on “franchise agreements and franchisor business practices, specifically how franchisors may exert control over franchisees and their workers.” The US government is committed to ensure fair and equal contracts for both parties as the FTC states that “the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized, and the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.” The FTC released the policy statement instead of amending its current Franchise Rule or issuing new regulations. According to the policy statement, it is 'unfair' for a franchisor to employ typical confidentiality, nondisparagement, or goodwill clauses since they can be seen as forbidding the reporting of unlawful activity to the authorities. Despite the fact that federal courts have viewed contracts as unenforceable to the extent that they exclude assistance with law enforcement inquiries, the policy statement includes these statements. It is anticipated that this tendency could pick up more steam by 2025, changing the franchise landscape.
The inclusion of fair treatment provisions restrict the franchisor's power to alter important parts of the franchise agreement on their own. These adjustments are typicallymade to supply chain specifications, operational standards, or pricing schemes. The goal of fair treatment clauses is to shield franchisees from irrational or abrupt requests that can affect their bottom line revenue. Rights of termination and renewal are also being scrutinized more closely. Laws are being passed by governments that give franchisees more options for extending their contracts or recovering their investments in the event that the franchise arrangement terminates. For example, franchisees may have more stability and planning power if required notice periods and reasons for non-renewal are made standard. The current policy statement does not improve certainty regarding the current status of the law or offer helpful guidance. Instead, it casts doubt on the use of confidentiality, non-disparagement, non-disclosure, and goodwill clauses in franchisor-franchisee agreements. The clause is unlikely to assist franchisors in adhering to the law and may even make it more difficult for them to safeguard their intellectual property and brands. Disclosure Laws are becoming stricter by forcing franchisors to give comprehensive financial and operational data up front. This covers anticipated profits, franchisor expenses, and possible hazards. This kind of clarity guarantees that potential franchisees can make well-informed financial choices prior to signing a franchise contract.
2. Updating FDD Sharpness
The Federal Disclosure Document (FDD) is a legal document that includes comprehensive information about the franchisor, the franchise opportunity, and financial performance to help the investor make an informed choice. Regarding franchisors charging franchisees concealed or unlisted fees, the FTC issued Staff Guidance. The staff guideline cites numerous instances asserting that any new or higher charge that is not mentioned in the Franchise Disclosure Documents (FDD) could likely be a violation of Section 5 of the FTC Act. In response to franchisees' complaints that franchisors were charging extra fees, specifically to handle new service and technology integration, the FTC staff released an additional staff guidance. The FTC made it clear that, in their opinion, it is against the FTC Act to unilaterally alter operating manuals and other papers in order to impose and collect fees that were not previously disclosed in the FDD.
To ensure that the franchising business frameworks reflect the changing legal, economic, and social environments in the US, it is vital for business owners to continuously review contractual laws, agreements, and case laws. Businesses can encounter issues that require contracts and legal agreements to be precise, flexible, and clear as industries are becoming more complex. The potential ramifications of agreements and the connections between parties frequently span several jurisdictions, legal systems, and cultural contexts. This is particularly true for franchising and acquisitions. Routine revisions to contractual laws aid in addressing concerns related to labor law compliance, operational autonomy, and franchisee rights in franchising. Existing franchise agreements are enforced differently as a result of changes in case law, which are frequently influenced by court decisions and conflicts.
3. M&A Trends
The mergers and acquisitions (M&A) market is about to undergo a dramatic change as 2025 begins, with mid-market transactions predicted to take center stage. A new U.S. administration, lower interest rates, and decreased inflation are driving change and giving dealmakers hope. Large acquisitions are being closely examined by regulatory agencies, especially in sectors like technology, healthcare, telecommunications, and finance that have direct influence on consumers. Instances involving tech giants and pharmaceutical firms have shown that authorities are becoming more inclined to oppose mergers, believing them to be detrimental to competition. For example, authorities are increasingly looking at possible long-term implications of decreased innovation and higher barriers to enter for smaller competitors, in addition to the immediate market impacts. Companies that intend to merge in 2025 will have to carefully manage this regulatory landscape. Preventive measures will become crucial, including conducting antitrust risk assessments, interacting with regulators at an early stage, and providing remedies like divestitures. Given the growing influence of lawmakers and consumer advocacy groups on regulatory issues, businesses also need to think about how their transactions will be viewed politically and publicly.