Franchisee Candidates: A Review of Your Rights Under California Law

In our role as franchise consultants for FranNet of California, we do our best to provide our audience with useful information related to entrepreneurship. If you’re among those who have considered franchising as a means to owning a business of your own, it’s important for you to know certain facts that pertain to the state of California. Residents here are bound by certain laws, rights, and acts, which define the parameters of franchising in the Golden State.

Below is a review of California’s Franchise Investment Law and the California Franchise Relations Act, including disclosures and information you should be aware of if you’re considering buying a franchise in our state.

California Franchise Investment Law

The California Franchise Investment Law includes specific pre-purchase requirements that all franchisors (brands) must follow to do business in the state. By design, this law sets forth certain protections, preventions, and disclosures for consumers. One of the key provisions regulates the Franchise Disclosure Document (FDD) that all franchisors must have on file. They must be registered with the state of California on an annual basis. When selling a franchise opportunity, the franchisors must provide the FDD to franchisee candidates at least 14 days prior to any signed agreement or transaction for the purchase. Of all the documents that potential franchisee candidates will review, the FDD is among the most important. There are 23 distinct sections that cover every aspect of the franchise opportunity, as well as required disclosures the franchisor must provide. It’s highly advisable to review the FDD with legal counsel, of which FranNet of California can provide a referral.

The California Franchise Investment Law further stipulates that if franchisors do not receive the lawful and appropriate disclosures from the franchisor, they may rescind any agreement and transaction – and even recover monetary damages. California residents may claim protection under this law, even if the franchisor claims other laws supersede these protections.

California Franchise Relations Act

The California Franchise Relations Act is in place to govern, manage, and oversee the existing relationship between franchisor and franchisee. The act sets forth limitations on the franchisor’s ability to terminate an agreement unless certain requirements are met. Basically, even for cause (except in defaults that are time-sensitive or a threat to public safety), a franchisor cannot terminate an agreement with a franchisee without providing 60 days written notice, and an additional 60 days to remedy the situation. Save for the exceptions above, it’s the franchisor’s responsibility to purchase back all inventory, equipment, supplies, and fixtures from the franchisee. In essence, terminating an agreement must be for a “good cause”, and not arbitrary in nature.

In addition to the limitations on terminating an agreement, there are also requirements for franchisors to follow if they do not intend to renew a franchisee’s contract. Franchisees are to be given a 180 day notice if a franchisor is not interested in renewing. And, again, it must be for a “good cause” and not arbitrary. And, like the termination clauses, franchisors are required to purchase back the franchisee’s remaining assets. If a franchisee wishes to sell their franchise to a buyer that meets the same qualifications as a new franchisee, the franchisor cannot object. The franchisor has 60 days to provide a legitimate reason to deny a sale or transfer.

Overall, the California Franchise Relations Act offers extra levels of consumer protection, and provides an amenable exit strategy, for franchisees in this state.

If you’ve been considering an entrepreneurial future, we’d love to introduce you to the world of franchising – an advantageous route to business ownership of your own. When you schedule a visit with FranNet of California, it costs you nothing to discover what your options might be. Our role and function are to guide you, advise you, assist you, and support you, so that you can make your own informed decisions on the direction you want to go. Over time, we’ve had the opportunity to work with hundreds of entrepreneurs who ended up owning the business of their dreams – and we can do the same for you. Without the aid of a crystal ball, we can’t predict what’s in store for Californians. But you always have the option to take matters into your own hands. Getting started with FranNet of California is easy, and you can book an introductory session with us by following this link.

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