The term franchise refers to a marketing concept, as well as a business model. Businesses or organizations that utilize a franchise system grants authorization to an individual or group. This enables them to sell branded products and services. The most common and instantly recognizable example of a franchise would be fast food restaurants.

Under a franchise arrangement, a franchisor initially establishes a brand, as well as the brand’s trademark and business system. A franchisee pays an initial fee and in return, they receive the right to conduct business under the franchisor’s name.

Before deciding on what franchise to purchase, it is important to first investigate the background and nature of the franchise company. Some questions to ask include, but may not be limited to:

  • What do other franchise owners say about the franchise? Are they overall satisfied with working with the franchisor?
  • Does the franchise have name recognition, and/or a good reputation (good will)? If not, why?
  • What does the franchise offer its franchisees in terms of service for problems and questions? Does the franchisor offer suitable support to its franchisees?
  • Have there been any lawsuits against the franchiser by a franchisee? What was the outcome?
  • What is the required training?
  • What are the prospective returns on having that franchise in your location? Is it worth the time and monetary investments?

Each state may have their own laws regarding franchises and franchising. Generally speaking, California’s Franchise Investment Law requires that franchisors register with the Department of Corporations. They are to do this prior to offering and selling franchises in the state of California.

What Are Examples of Franchises?

There are two main categories in which every franchise arrangement may be included. Entire Business format franchise is the most common type of franchise. The franchisee is provided with the following:

  • Trade name;
  • Products and/or services;
  • Entire operating system;
  • Location selection;
  • Development support;
  • Operating manuals and training;
  • Brand standard with which to adhere;
  • Quality control;
  • Marketing strategy; and
  • Business advisory support provided by the franchisor.

The most specific examples of business format franchise include McDonald’s and the gas station, 7-Eleven.

A less common type of franchise structure is the traditional or product distribution franchise. The franchisor distributes a specific product to their franchisees. A simple example of this would be a vending machine. Another example of traditional or product distribution franchise would be a car dealership.

Franchising in California extends to include all written and/or oral agreements in which a franchisor grants rights to a franchisee. California law provides a broad definition regarding what constitutes a franchise fee. Some of the most common examples of franchises in California being offered involve:

  • Healthy snack vending machines;
  • Virtual real estate services;
  • Fitness classes and gyms;
  • Childcare facilities; and
  • Laundromat facilities.

What Is the Franchise Disclosure Agreement?

The franchise disclosure document is a contract between the franchisor and franchisee. This contract establishes the rights and obligations of both parties, and is legally binding. A typical franchise disclosure agreement includes the following provisions:

  • A detailing and statement of the franchise fee;
  • Franchisor restrictions placed on the business management structure of the franchisee
  • A detailing and statement of inventory charges;
  • Information regarding the minimum income the franchisee must maintain, as well as calculation date;
  • Length of the agreement; and
  • A termination clause detailing what event would cause the franchisor to terminate the franchise agreement.

How Do I Open or Register a Franchise in California?

As previously mentioned, California is a franchise registration state. What this means is that in addition to federal franchise laws, there are supplemental laws requiring franchisors to register their franchise disclosure document (“FDD”) with a local state regulator. This must be done prior to offering or selling a franchise within the state of California. FDD registration requires that a state examiner reviews the franchise registration application and grants their permission to offer and sell franchises within the state.

The initial FDD registration fee in California is $675. Annual renewal for California franchise registration is $450. Registration expires 110 days after the end of the franchisor’s fiscal year. The Department of Business Oversight is responsible for regulating the enforcement of California’s Franchise Investment Law, as well as the registration of FDDs.

If you are filing a franchise application in the state of California, the following is an incomplete list of what you should include with the application:

  • Filing fee;
  • Cover letter containing specific information such as the franchisor’s fiscal year end date;
  • Supplemental Information Page;
  • California State addendum; and
  • Sales Agent Disclosure form.

Generally speaking, a California FDD registration and renewal applications must be filed in person. There are three California Department of Business Oversight locations which will accept the FDD registration and renewal applications.

How to Expedite the Renewal of a California Franchise

The amount of time in which you may receive registration will depend on several factors. The quality and thoroughness of the FDD and registration applications is largely what determines how quickly approval may be granted. Additionally, how quickly the applicant responds to a comment letter from the examining attorney that has been assigned to review their application determines approval time.

California Law recommendations include taking certain steps in filing a franchise renewal. The renewal application must have:

  1. A cover letter which clearly lists the name of the applicant, the assigned file number (if known), and the franchisor’s fiscal year-end date (as previously mentioned);
  2. A Filing fee of $450, payable to the “California Department of Business Oversight” (as previously discussed);
  3. An Application Facing Page;
  4. A signed and notarized Signature Verification Page and Corporate Acknowledgment; and
  5. Financial statements which have been audited according to GAAP, with a manually signed consent by the CPA or firm that was responsible for auditing the financial statements.

Franchise agreements can also be terminated or not renewed. Ultimately, what occurs when a franchisee does not renew their license depends on what the franchise agreement says. For example, if the franchisee did not comply with the terms of the agreement, typically the franchisor will have the option of whether to allow the franchisee to renew or not renew the franchise. 

In some cases, a franchisor may go after the franchisee for legal damages if they failed to meet the terms specified in the franchise agreement, such as failing to correct defects or maintain certain quality standards. Once again, the legal consequences are dependent upon the contract entered into between the franchisor and the franchisee. Additionally, some states require that the franchisee give the franchisor notice before terminating or not renewing the franchise agreement. 

Should I Contact a California Franchise Attorney?

If you are interested in franchising in California, you should consult with a skilled and knowledgeable California business lawyer. An experienced business attorney can assist you whether you are a franchisor, or a franchisee. They will be aware of local and federal laws and processes, and can ensure your application is satisfactory. 

Additionally, an experienced local attorney can also represent you in court as needed. Before agreeing to any sort of franchise agreement, you should have your attorney review the documents in order to determine whether it is legally sound and in your best interests. They may also assist you in negotiating a better franchise disclosure agreement than what you are being offered.