Becoming a franchisee is an appealing way for many aspiring business owners to dip their toes into the entrepreneurial universe. Generally, there is a proven business model and process for franchisees to follow, in addition to many other forms of support provided by franchisors. There is still a fair amount of due diligence for potential franchisees to conduct, however, before agreeing to this business relationship. A key part of this due diligence is reading through the “franchise disclosure document” (FDD).
California is a Franchise Registration State
California is one of about a dozen states that requires franchisors to register with a state agency. In the Golden State, franchises must be registered with the state’s Department of Financial Protection and Innovation. In keeping with the state’s reputation as having a strict business environment, California has rigorous registration requirements for franchises; these requirements are regarded as similar to those for stocks or securities. As a result of this registration requirement, prospective franchisees are able to access existing FDDs online easily.
What is Contained in the Franchise Disclosure Document?
The contents of any FDD are fundamentally the same, thanks to the Federal Trade Commission. Each FDD has 23 sections that address distinct areas of the franchise, including but not limited to the following:
- Details about the franchisor, parents, predecessors, and affiliates,
- Fees that will be paid by the franchisee,
- Estimated initial investment,
- General obligations of the franchisee,
- Territory covered by the franchisee’s location,
- Intellectual property owned or held by the franchisor,
- Various financial statements, and
- Contracts involved with the franchise.
California also requires additional information on certain FDDs. A typical FDD is hundreds of pages long. Despite its length, you should NOT skim through sections you don’t think are important!
When Does a Franchisee Receive the Franchise Disclosure Document?
At least 14 days must pass between receipt of the FDD and the signing of the franchise agreement. This time requirement stems from the belief that potential franchisees should have enough time to examine all pertinent documents thoroughly in order to make an informed business decision.
California Franchise Registration Requirements are Complex
Relative to other states, California franchisors have a large number of requirements to fulfill when starting a franchise or converting their existing business into a franchise. These requirements benefit potential franchisees. Whether you want to become a franchisor or a franchisee, Integrated General Counsel can help. Give us a call at 925-399-1529 to discuss your options.
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