Franchise brokers and third-party sellers active in California would be required to register with the state’s Commissioner of Financial Protection and file a seller disclosure form if new legislation introduced in the senate becomes law.
Senate Bill No. 919, sponsored by Sen. Tom Umberg in January and now being considered by the Rules Committee, would cover franchise brokers, broker networks and organizations, and franchise sales organizations; it does not apply to franchisors, subfranchisors or area representatives.
The registration requirement, as proposed, would go into effect July 1, 2025, and would apply not just to sellers in California but also to those working with any prospective franchisee who resides in the state, or if the franchise business will be located in the state. It would create a cause of action that allows franchisees to sue for damages and recission if a seller violates the law. Franchisors would likewise be able to sue.
Third-party sellers, as part of the registration process, would pay a $250 fee.
IFA General Counsel Sarah Davies notes SB 919 was crafted to minimize administrative costs, an important point as the State of California faces a large budget deficit.
The bill, which the International Franchise Association helped craft, also calls for the creation of a Uniform Third-Party Franchise Seller Disclosure Form, to be filed by the third-party franchise seller. It would include standardized information covering, among other general points: a third-party seller’s role in the franchise sales process; services the seller might provide; and different ways a third-party seller might be compensated for services.
The form would also require the disclosure of a specific seller’s litigation history, how that seller is compensated and the name and contact information for all franchisees to whom the seller sold a franchise anywhere in the United States during the last five years.
Sarah Davies, general counsel for the IFA, said the move to work with lawmakers in California is part of the organization’s responsible franchising initiative. Its board of directors met during last year’s IFA Convention as the Federal Trade Commission was signaling a more aggressive stance in its oversight of franchising. Among the issues identified was the need to improve the disclosure provided by third-party franchise sellers.
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“It was, how do we improve the presale process for prospective franchisees so they better understand what they’re buying and whom they’re buying from,” said Davies. The registration component is similar to what is already required in New York and Washington, while the disclosure component is new and comes amid a “rapid expansion in the franchise sales space.”
“Prospective franchisees might touch multiple third-party sellers before they get to the actual franchisor,” she noted, and the disclosure form is meant to educate prospects on the role of those sellers and help them better understand the sales process.
Jania Bailey is the CEO of FranNet and in 2018 introduced a broker disclosure document at the company.
The IFA said it gathered input to represent the perspectives of franchisees, franchisors, broker networks and franchise sales organizations as it helped develop the bill’s language. Jania Bailey, CEO of franchise consulting and brokerage firm FranNet, was part of the IFA’s working group and said she is “absolutely supportive” of the bill.
“It’s like the wild, wild West out there,” said Bailey, with thousands of third-party sellers and too many of them acting in ways that can “do real damage” to franchisees and franchisors if they misrepresent the franchise offering, make financial performance representations outside of what’s provided in the franchise disclosure document or sell a franchise to someone who doesn’t meeting the financial qualifications.
“We’re the only business group that handles decisions of this magnitude with consumers that isn’t regulated,” she said. “We impact lives, and that can be good or it can be bad.”
Also a franchisor, FranNet created its own broker disclosure document in 2018 that includes a client bill of rights, describes the types of franchisors it works with and explains all fees are paid by the franchisor client, not the candidate. Its network of consultants and brokers don’t handle franchise sales transactions. The final sale is completed by the franchisors it works with, an important distinction, Bailey said, and one she hopes is clarified in the bill’s final language.
Attorney Brian Schnell of Faegre Drinker noted prospective franchisees often interact more with the franchise broker in the early stages of the sales process than the franchisor itself and should have complete information up front. There are more third-party franchise sellers operating than ever before, he continued, “and it’s important to close any gap in the disclosure process.”
“I’m a big believer in franchise education,” said Schnell, who worked with the IFA on the bill’s language. “There’s a piece of the document intended to educate a prospective franchisee about the role of brokers and questions to ask in the process.
“We’re trying to move the needle on prospective franchisees having a better understanding of not just the franchise opportunity, but franchising generally.”
The North American Securities Administrators Association, which provides guidance for state franchise regulators, is also considering a broker disclosure policy, and Schnell said he expects more states to consider legislation similar to what’s being presented in California. The focus, he said, should be on disclosure, “rather than regulating the franchise relationship.”