CA Franchise Specialist flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Franchise Investment Law citation

California Corporations Code sections 31000 through 31516, the statute regulating offers and sales of franchises and administered by the Department of Financial Protection and Innovation.

Three franchise elements

A marketing plan prescribed substantially by the franchisor, association with the franchisor's trademark, and payment of a required franchise fee.

Pre-sale disclosure deadline

The FDD must be delivered at least 14 calendar days before the prospective franchisee signs a binding agreement or pays any money to the franchisor.

Material fact standard

A fact is material if a reasonable prospective franchisee would consider it significant in deciding whether to purchase the franchise.

Anti-fraud provision

Section 31200 makes it unlawful to make untrue statements of material fact or omit material facts in connection with an offer or sale of a franchise.

FDD Item 19

The financial performance representation item, disclosing actual or projected sales, costs, or profits with a reasonable basis, data source, and assumptions.

FDD Item 20

The outlets and franchisee information item, reporting counts of franchised and company-owned units, transfers, terminations, and non-renewals for three fiscal years.

FDD Item 21

The financial statements item, requiring audited financial statements of the franchisor prepared under generally accepted accounting principles.

FDD receipt requirement

The franchisor must provide a duplicate receipt for the FDD and retain a signed receipt or acknowledgment of electronic delivery.

Annual FDD update

The FDD must be updated within 120 days after the franchisor's fiscal year end and amended promptly for material changes.

Registration filing

A uniform franchise registration application filed with the DFPI, including the FDD, consent to service of process, and the required fee.

Registration effectiveness period

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

Stop order authority

The DFPI may issue a stop order halting an offering that is unfair, inequitable, or lacks adequate financial responsibility, subject to administrative hearing.

Exemption for insiders

Offers and sales to the franchisor's own officers, directors, or general partners are exempt from registration under the Franchise Investment Law.

Limited offering exemption

An exemption for offers to a limited number of offerees within a 12-month period, subject to statutory conditions and anti-fraud compliance.

Registration not merit approval

DFPI registration does not constitute a finding that the offering is fair or meritorious, and the agency disclaims approval of the merits.

Audited statement requirement

Financial statements in the FDD must be audited by an independent certified public accountant and cover the franchisor's most recent fiscal years.

Start-up franchisor alternatives

A franchisor lacking audited statements may provide reviewed or compiled statements with a guarantee or other financial assurance acceptable to the DFPI.

Bankruptcy disclosure

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

Interim financial statements

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

Offering circular addenda

State-specific addenda required by the DFPI must accompany the FDD to form the complete franchise offering circular.

Franchise Relations Act citation

California Business and Professions Code sections 20000 through 20043, governing the ongoing franchisor-franchisee relationship including termination and renewal.

Good cause for termination

A material breach of the franchise agreement that continues uncured after at least 30 days' written notice and a reasonable cure opportunity.

Non-renewal notice period

A franchisor must give at least 180 days' prior written notice before refusing to renew a franchise in California.

Termination notice period

At least 60 days' written notice of termination is required, except where immediate termination is permitted for specified grounds.

Immediate termination grounds

Abandonment, insolvency, or conduct that materially impairs the goodwill of the franchise network permits termination without the standard cure period.

Inventory repurchase duty

On termination, the franchisor must purchase or permit sale of specified inventory and supplies at fair value as required by statute.

Earnings claim rule

Any income or sales claim in advertising must be supported by an Item 19 disclosure and a reasonable basis, or it is unlawful.

Testimonial disclosure

Endorsements must reflect actual experience and must disclose any material connection between the endorser and the franchisor.

Rescission remedy

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

DFPI enforcement powers

The DFPI may investigate, issue desist-and-refrain orders, impose administrative penalties, and refer willful violations for criminal prosecution.

Ethical candor duty

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