Franchisors in California planning to sell franchises in the state must fulfill the state’s registration requirements and provide the proper franchise disclosure documents to both the California government and the potential franchisee. To avoid potentially costly mistakes, many franchisors seek assistance from an experienced franchise lawyer to ensure they comply with California franchise law and registration requirements.
The California statutes include a broad definition of a franchise, so sometimes businesses are unaware that they are required to comply with these state laws. California was one of the first states in the country to enact franchise disclosure laws, and regulators are vigilant about protecting prospective franchisees.
The California Department of Business Oversight is the state agency charged with enforcing the Franchise Investment Law. This law requires registration with the Department before a franchisor can offer franchises for sale. Franchisors are obliged to provide prospective franchisees with disclosure documents and final franchise contracts no less than 14 days before a franchise sale.
The purpose of the disclosure provisions in the California Franchise Investment Law is to ensure that a potential franchisee has accurate information about the franchisor and the franchise itself to make an informed purchase decision. In addition to disclosure requirements, California franchise law also outlines certain fraudulent and prohibited practices that may constitute civil or even criminal violations. If there is uncertainty about the legality or compliance in franchising, it is essential to consult with an attorney experienced in franchise law.
California laws requiring disclosure in the sale of franchises are set forth in the state code starting with Cal. Corp. Code §31110. Franchisors must submit an application for registration to be filed on a Uniform Franchise Registration Application form. This must be accompanied by authorization from the Commissioner of the Department of Business Oversight to examine financial records pertaining to the sale. The Application form should be accompanied by the franchise disclosure document with the required disclosures. A franchise attorney could help draft this disclosure document to maximize the chance of successfully franchising the business.
Franchisors must be aware of any additional provisions of California franchise law. The Commissioner may take action to protect franchisees if the franchisor fails to demonstrate appropriate financial arrangements to fulfill obligations made during the sale, such as equipment, inventory, or training. California franchise laws and registration requirements give the Commissioner the discretion to impound franchise fees or require the escrow of files until all obligations are satisfied. Franchise registration applications must include financial statements including a recent balance sheet and profit and loss statements for each of the past three fiscal years. Statements must be prepared and audited in accordance with generally accepted accounting principles.
After a franchisor files an application for registration and the application is considered “complete,” it may take effect automatically. For that to occur, the franchisor must include the $675 registration fee, the franchise disclosure document, and all required financial statements and other supporting exhibits. The following documents should be sent to the California Department of Business Oversight at their offices in Los Angeles, San Francisco, or Sacramento.
After an application is complete, if the Department of Business Oversight does not send a comment letter describing deficiencies or issue a stop order, then the registration automatically takes effect on the 30th business day after the complete filing.
If a franchise is renewed before the current registration expires, the renewal fee is reduced to $450. When these renewals are not completed according to all the guidelines and within the prescribed timeline, the franchisor may be forced to start their registration process from the beginning of the registration process.
To ensure that registration requirements are fulfilled so an application can be approved promptly, many franchisors find it helpful to work with an experienced franchise attorney familiar with California franchise law and registration procedures. Call today to start franchising your business.