California Franchise Law and Registration

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 Is California a Franchise State?

Yes, in general, California is a franchise state. California’s Franchise Investment Law mandates that all franchisors register with the California Department of Corporations.

This registration must be done prior to offering and selling a franchise in the State of California. Franchise is a term that refers to a marketing concept as well as a business model.

Institutions or businesses that use franchise systems give consent to individuals or groups that enable those individuals or groups to sell the branded products and services. Most individuals would be familiar with fast food restaurants as common recognizable examples of a franchise.

Under a franchise agreement, the franchisor establishes a brand as well as the brand’s trademark and business system. The franchisee pays an initial fee and, in return, obtains the privilege to conduct business under the name of the franchisor.

Prior to deciding on which franchise to buy, an individual should investigate the background as well as the nature of the franchise company. Questions that an individual should ask may include, but are not limited to:

  • What are the opinions of other franchise owners regarding the franchise?
    • Are they pleased with working with the franchisor overall?
  • Does the franchise have name recognition and a fine reputation?
    • If not, why?
  • What does the franchise provide its franchisees with regard to assistance dealing with issues and questions?
    • Does the franchisor offer practical help to its franchisees?
  • Have there been any lawsuits filed against the franchiser by any franchisees?
    • What was the result?
  • What is the needed training?
  • What are the prospective returns of having that franchise in the area?
    • Is it worth the time and financial investments?

It is important to note that every state may have its own laws concerning franchises and franchising. For questions about California franchise law, an individual should consult a franchise lawyer in California.

What Are Examples of Franchises?

Common examples of franchises include fast food restaurants, such as McDonald’s, and gas stations, such as 7-Elevens. Popular franchises in California include:

  • Checkers;
  • Gloria Jean’s Coffee;
  • Meineke Car Care Centers;
  • Firehouse Subs.

Common categories of franchises in California include:

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

There are also less familiar types of franchise structures, including traditional or product distribution franchises. With these types of franchises, the franchisor will allocate a specific product to its franchisees.

One common example of a product or distribution franchise is a vending machine. Another example of a traditional or product distribution franchise is a car dealership.

There are two main categories for every type of franchise agreement. The standard type of franchise is the entire business format franchise.

With this type of franchise, the franchisee is provided with the following:

  • Trade name;
  • Products and services;
  • Entire operating system;
  • Location selection;
  • Development support;
  • Operating manuals and training;
  • Brand standard with which to adhere;
  • Quality control;
  • Marketing strategy; and
  • The franchisor provides business advisory support.

In California, franchising extends to include all oral or written agreements in which the franchisor grants rights to the franchisee. California laws provide a broad definition regarding what constitutes a franchise fee.

If an individual has any questions regarding California franchise investment law, they can consult with a local California attorney.

How Do I Open or Register a Franchise in California?

As noted above, California is a franchise registration state. This means that, in addition to the federal franchise laws, there are also regulations that mandate franchisors register their franchise disclosure document (FDD) with a local state regulator.

An individual will be required to complete this prior to offering or selling a franchise within the state of California. FDD registration provides that a state examiner is required to review the franchise registration application as well as grant permission to offer and sell franchises within the State of California.

The FDD initial registration fee is $675 in California. The fee for the annual renewal for the California franchise registration is $450.

The registration will expire 110 days following the end of the franchisor’s fiscal year. The Department of Business Oversight is the agency that is responsible for regulating the enforcement of California’s Franchise Investment Law as well as the registration of FDDs.

If an individual is filing a franchise application in California, they should include all of the following with their application:

  • Filing fee;
  • A 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.

In general, California FDD registration and renewal applications have to be filed in person. There are three California Department of Business Oversight locations that accept FDD registration and renewal applications.

Who Regulates Franchises in California?

In California, franchises are regulated by the Department of Financial Protection and Innovation.

What Is the Franchise Disclosure Agreement?

A franchise disclosure agreement is a contract that is entered into between the franchisor and the franchisee. This contract outlines the rights and duties of both of the parties and is legally binding.

Standard franchise disclosure agreements include provisions such as:

  • A detailing and statement of the franchise fee;
  • Franchisor limitations placed on the business management structure of the franchisee
  • A detailing and statement of inventory charges;
  • Information about the minimum income the franchisee is required to sustain, in addition to the calculation date;
  • Length of the agreement; and
  • A termination clause detailing what occurrence would cause the franchisor to terminate the franchise agreement.

How to Expedite the Renewal of a California Franchise?

The amount of time it may take for the renewal of a California franchise to process will depend on several factors. The quality and thoroughness of the FDD and registration application will largely determine how quickly an approval will be granted.

In addition, the speed with which the applicant responds to a comment letter from the examining lawyer that has been assigned to examine their application will also determine approval time. California laws recommend taking specific measures when filing a franchise renewal.

Each franchise renewal application is required to include the following:

  • A cover letter that lists:
    • the name of the applicant;
    • the assigned file number, if available;
    • the franchisor’s fiscal year-end date;
  • A Filing fee of $450, payable to the “California Department of Business Oversight”;
  • An Application Facing Page;
  • A signed and notarized Signature Verification Page and Corporate Acknowledgment; and
  • Financial statements have been audited according to GAAP, including manually signed consent by the firm or CPA who is responsible for auditing the financial statements.

Can a Franchise Agreement Be Terminated?

Yes, a franchise agreement can also be terminated or not renewed. What occurs when the franchisee does not renew their license will depend on the language included in the franchise contract.

For example, if the franchisee did not comply with the terms of the agreement, the franchisor may have the option of allowing the franchisee to renew or not renew the franchise. In some situations, the franchisor may sue the franchisee for legal damages if they fail to meet the terms that were established in the franchise agreement. For example, failing to maintain specific quality standards or to repair defects.

In some states, the franchisee must provide notice to the franchisor prior to terminating or not renewing the franchise agreement.

Should I Contact a California Franchise Attorney?

If you are considering franchising in the State of California, it is important to consult with a California business lawyer. Your attorney can assist you whether you are the franchisor or the franchisee.

Your lawyer will be able to advise you of the local and federal laws and processes and help ensure your application is satisfactory. Prior to entering into any franchise agreement, your attorney should review the documents to ensure they are in your best interests and are legally sound.

In addition, your attorney may be able to help you negotiate a better franchise agreement than what you were offered. If a dispute arises regarding your franchise, your lawyer will be able to represent you in court.

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