CA Franchise Specialist cheat sheet

The Franchise Investment Law (Corp. Code §§31000 et seq.) governs offers and sales of franchises in California and is administered by the Department of Financial Protection and Innovation (DFPI).

A franchise exists under §31005 when three elements combine: a marketing plan or system prescribed substantially by the franchisor, a trademark or commercial symbol association, and a required franchise fee (or a representation of a fee exceeding $100).

The required pre-sale disclosure document is the Franchise Disclosure Document (FDD) prepared under the FTC Franchise Rule; California law requires delivery at least 14 days before signing a binding agreement or paying money.

Willful untrue statements of material fact or omissions in a disclosure document or registration application are unlawful under §31200 and can support rescission, damages, and criminal exposure.

Materiality is judged by whether a reasonable prospective franchisee would consider the fact significant in deciding whether to purchase.

Anti-fraud liability extends to the franchisor, its officers and directors, and persons who materially aid a violative sale; controlling-person liability applies to those who materially aid the violation.

No person may offer or sell a franchise in California unless the offer is registered, exempt, or covered by an effective registration of the franchisor.

The FDD contains 23 numbered Items (Item 1 the franchisor and predecessors; Item 19 financial performance representations; Item 20 outlets and franchisee information; Item 21 audited financial statements).

Delivery deadlines: 14 calendar days before signing a binding agreement or paying any consideration; the FDD must be accompanied by the required exhibits and receipts.

A receipt must be provided in duplicate; the franchisor retains a signed receipt or a signed acknowledgment of electronic delivery.

Item 19 may present actual or projected performance only if the franchisor has a reasonable basis and discloses the data source, sample, and assumptions.

Financial statements in Item 21 must be audited for the most recent fiscal year and prepared in accordance with generally accepted accounting principles.

The FDD must be updated within 120 days after the close of the fiscal year to reflect changes, and promptly amended for material changes.

Item 20 tables report counts of franchised and company-owned outlets for the prior three fiscal years, transfers, terminations, non-renewals, and reacquisitions.

Registration is made by filing a uniform franchise registration application with the DFPI, accompanied by the FDD, consent to service of process, and the required filing fee.

The DFPI may issue a stop order if the offering is unfair, inequitable, or the applicant lacks adequate financial responsibility; a stop order can be challenged at an administrative hearing.

Statutory exemptions include offers to a person who is a franchisor or an officer, director, or general partner of a franchisor, and offers to not more than a limited number of offerees in a 12-month period.

A registration is effective for one year from the effective date and must be renewed annually with an updated FDD and fee.

California recognizes a 'large franchisee' or sophisticated-purchaser exemption where the franchisee meets specified net worth or investment thresholds.

A franchisor relying on an exemption must still comply with the anti-fraud provisions of the Franchise Investment Law.

Registration is not a finding by the DFPI that the offering is meritorious; the DFPI disclaims approval of the merits.

The franchise offering circular must include the FDD, exhibits, and any state-specific addenda required by the DFPI.

Audited financial statements must be prepared by an independent certified public accountant and cover the franchisor's two most recent fiscal years (or a permitted alternative for start-up franchisors).

A start-up franchisor without audited statements may provide a reviewed or compiled statement together with a guarantee or other financial assurance acceptable to the DFPI.

Financial statements must disclose the franchisor's assets, liabilities, and net worth so the franchisee can assess financial responsibility.

The offering circular must disclose any bankruptcy history of the franchisor or its principals within the preceding 10 years.

Unaudited interim statements may be required if the most recent audited fiscal year ended more than 120 days before the offering.

A franchisor must amend its offering circular for material changes and deliver the amended document to prospective franchisees.

The Franchise Relations Act (Bus. & Prof. Code §§20000 et seq.) governs the ongoing relationship between franchisor and franchisee in California.

Good cause for termination requires a material breach of the franchise agreement that remains uncured after at least 30 days' written notice and a reasonable opportunity to cure.

Immediate termination is permitted only for specified grounds such as abandonment, insolvency, or conduct that materially impairs the goodwill of the franchise network.

A franchisor may not terminate or refuse to renew a franchise without giving at least 180 days' prior written notice of non-renewal.

The franchisor must give at least 60 days' written notice of termination, except where good cause permits shorter notice.

A franchisee may not be terminated for failing to meet a sales quota unless the quota was set in good faith and the franchisee was given a reasonable opportunity to meet it.

On termination, the franchisor must purchase or allow the franchisee to sell specified inventory and supplies at fair value as required by statute.

Advertising and marketing materials must be truthful, not misleading, and consistent with the representations in the FDD.

Any claim of earnings, income, or sales must be supported by the Item 19 disclosure and a reasonable basis; unsupported earnings claims are unlawful.

Endorsements and testimonials must reflect the actual experience of the endorser and must disclose any material connection to the franchisor.

The franchisor must not advertise a franchise as an investment or make guarantees of profit or return.

Salespersons must be trained on disclosure obligations and must not use high-pressure tactics or misrepresent the franchise opportunity.

Advertising must identify the franchisor and must not use a name confusingly similar to an existing franchise.

Online and social media marketing is subject to the same anti-fraud rules as print advertising.

A franchisee may rescind a franchise sale made in violation of the disclosure requirements and recover consideration paid, plus interest and costs.

Civil remedies include damages, rescission, injunctive relief, and attorney's fees for prevailing plaintiffs.

The DFPI may investigate, issue desist-and-refrain orders, impose administrative penalties, and refer criminal matters to prosecutors.

Willful violations of the Franchise Investment Law may be prosecuted as criminal offenses with fines and imprisonment.

A franchisee may bring a private action for fraud, breach of contract, or violation of the Franchise Relations Act.

Statutes of limitation: generally one year from discovery for rescission and four years for fraud claims under California law.

A franchisor's waiver of statutory rights in the franchise agreement is generally unenforceable where the statute protects the franchisee.

A franchise salesperson owes prospective franchisees honesty, candor, and full disclosure of material facts.

Conflicts of interest, such as commissions tied to closing, must be disclosed and must not compromise the accuracy of disclosures.

Confidential information received from a prospective franchisee must be protected and used only for evaluating the application.

Records of disclosure delivery, receipts, and communications must be retained to demonstrate compliance.

Sales personnel must not discourage a prospect from consulting independent legal, accounting, or business advisors.

Discriminatory or deceptive sales practices violate professional standards and may constitute unlawful business practices.

A professional must correct any previously provided inaccurate information promptly and in writing.