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If my franchise agreement is terminated can I stay in the same business?

Most franchise agreements have some sort of post termination non-competition clauses. This is where a franchisee's particular state laws, most notably California laws, favor franchisees (ex-franchisees). California Business and Professions Code §16600 voids any provision in a contract which is a restraint on trade meaning, If you are a California ex-franchisee, the franchisor can not enforce the non-competition clause in your franchise agreement. They should not even be threatening to do so, and certainly can not bring an action against you for being in a similar business. So you are free to engage in the same or similar and competing business after the term of your franchise agreement. Be aware however, other prohibitions such as prohibition against soliciting clients of the former franchise, or against soliciting employees of the former franchise or of another franchisee, or against using any proprietary information gained by being a franchise, are very much enforceable. If you are intending to be in a competing business or are in one after your franchise agreement is terminated, it is wise to seek legal counsel to be sure you stay within the laws and not buy yourself a lawsuit which can potentially put you out of business for good. Caution is also recommended that you do not start up the competing business while your franchise agreement is still in effect.

Challenges Facing California Franchisors : Choosing the Right Franchisees

In order to build your brand and successfully expand your franchise network, it is important to select the right franchisees, especially in the beginning. You want to ensure that you are attracting the type of franchisee who has the skills to execute the business plan for your franchise, but you are also usually looking for a candidate with sufficient capitalization. One of the primary business reasons for the failure of a franchisee is under capitalization - they simply don't have enough financial reserves to get the business up and running and sustain operations through the ramp up stage until the franchisee is profitable. It's one thing to have enough money to pay the franchise fees and get the doors open, but in order for your franchise business to thrive you need to recruit franchisees who have the reserves and the business savvy to see things through.

As a New California Franchisor, What Do I Put in My Franchise Disclosure Document if I Don't Yet Have a Trademark

New California franchisors should apply for an Actual Use registration if they are already using the name even before being registered to sell franchises. The Franchise Disclosure Document ( FDD ) Item 13 is where we describe the trademarks associated with the franchise business. If you application is on file, you need to disclose this and some related language. Your new franchise agreement should also contain language addressing the fact the application is on file and to reserve the right to change marks in the event your application is denied. An experienced franchise attorney can help word these sections in both the Franchise Disclosure Document and the Franchise Agreement to fully protect you. Additional Trademark language that reserves the right to change marks and logos is equally important. Do not skimp o this area as it is critical both at the beginning and in the future.

How Do I Begin Franchising My Business in California?

In order to sell franchises in the State of California you need what's called a Franchise Disclosure Document (FDD). This is a document with 23 required Items of Disclosure all about your business, the franchise business being offered and the contracts you will require a franchisee to sign. So the first legal step is to have this FDD created by an experienced California Franchise Attorney. Part of the FDD is a description the Training Program as well as the Table of Contents of the Operations Manual. These two items are critical, and should be created with care. Once the FDD is created, you will need to register as a new franchisor with the California Department of Oversight.This is a multi-page application and must be properly completed and submitted or your application will be significantly delayed. The FDD must be complete in accordance with CA laws and federal laws. The whole process takes several months so be prepared for this lead time. You can not sell or even offer to sell a franchise until your registration is approved by the State of California. As a client I can assist you with expediting this process by attending to all the detailed requirements timely.

Can You Franchise a California Service Business?

Absolutely! More and more California service business franchises are popping up, everything from home care to painting to handyman to computer repair to accounting, ever hear of H&R Block? The original service franchise. It's a bit trickier because the technician employees ARE the product you would be selling, so franchising a service business is in effect franchising the business model of providing technicians. All the same requirements of having systems for your business apply to the franchise model for device businesses, excel instead of franchising how to ordering product from suppliers, you are franchising how to contract with or employing technicians to provide the services of the business. Since the technicians need to be skilled, the business model will be focused more on how to find the right technicians, as well as managing them. As an experienced California franchise attorney I can help you navigate the differences in how to put together your business model for franchising your service business.

Why Do States Like California Require Impounding for Franchisors?

Each State (including California) has their own requirements for the financial strength of a potential franchisor including net worth, long term liabilities, short term liabilities, and the strength of the audit statement. All of these factors and more will affect this decision. Financial viability can affect impound requirements. During phases of rapid growth or investment in new product development or other business challenges, cash flow and net worth can be quite volatile. In cases where a franchisor may appear to the State to be undercapitalized or in a negative cash position or negative net worth the State generally will require impounding. There are strategies that an experienced and effective California franchise attorney can work with the State and with clients to help clients potentially avoid impounding of the upfront franchise fee.

How Do I Get Out of the Impound Requirement Imposed on a Franchisor?

Registration states such as California will require impounding of franchise fees if the financial information disclosed in the audit shows a negative cash position, negative net worth or other financial numbers that lead them to believe that the Franchisor will not be able to meet your obligations. How much money is not enough money in your cash account? In my work during the preparation of the FDD, and while we are preparing for the financial audit there are strategies that I can provide which may avoid the impounding requirements, allowing my clients to access franchise fees much more quickly. If impounding is required, it is possible to satisfy the state using 2 or 3 different alternatives less restrictive than impounding. This is important for franchisors to control the inflow of their upfront fees.

When is an Impound Account Required by a New Franchisor

In California, typically a new franchisor will be required by the Franchise Department to "impound" the upfront franchise fee. Impounding means the fees must be deposited in a State Mandated Escrow Type Account, until all the franchisor's pre-opening obligations have been satisfied. Then the franchisee has to certify that all of the franchisor's obligations have been met before the State will release the funds to the Franchisor. Franchisors obviously don't want to see their fees impounded because it delays access to their money. From a legal perspective,the Franchise Disclosure Document must clearly specify what a franchisor's pre-opening responsibilities are, and how they will be met. It's usually upon the physical (or virtual) opening of the franchise. In many cases this is simply a matter of training. In a brick-and-mortar situation it usually coincides with the physical opening of the business. The key to reducing the time you sell a franchise and the time you collect the upfront franchise fee from an impound account, is to minimize the pre-opening responsibilities. I advise my clients how best to position their pre-opening obligations to meet the legal requirement as well as the franchise business requirements. There are ways to avoid the impound requirements.

What about the post term non-compete clause in California franchise agreements?

Franchisors cannot include non-compete clauses because California law prohibits post term non-competition clauses in Business and Professions Code §16600. So why are they routinely in franchise agreements in California? The short answer is because most franchisors use the same document in all states. However, most franchisors will also have some sort of state addendum which outlines various laws of that state that override sections in the franchise agreement, such as California's B & P Code §16600. The reality is, even without the addendum or any other disclaimer language, such post term non-competition provisions are not enforceable in California, except in connection with a sale of the business, or other minor exceptions. However that is not the end of the story. California franchise law does not prohibit post term non-solicitation clauses, meaning a franchisee could be prevented from soliciting its customers after expiration or termination of the franchise agreement. A post-term non-solicitation clause can be very effective in achieving what a post-term non-competition clause can not. California franchise law also does not prohibit non-solicitation of current and former franchise employees. Finally all franchise agreements will have a confidentiality and/or trade secrets clause basically protecting all proprietary information given to or utilized by the franchisee during the franchise agreement term, from being utilized after the term for any reason. This would include not only the trademarked items, but the operations and all training manuals, and information and even all the marketing materials. Franchisees that are nearing the end of their term or in danger of having their franchise agreement terminated, would be wise to have an experienced California franchise attorney review the post term prohibitions for options and solutions in this regard.

Transferring or Selling a Franchise in California without the franchise rights.


Transferring or selling a franchise business in California (as a franchisee) can be a complicated issue. Usually, the Franchise Disclosure Document (FDD) or "Franchise Agreement" (the contract between a franchisor and the franchisee) specifies the terms and conditions for a franchisee to transfer or sell their existing franchise(s). The franchisor will very succinctly spell out the conditions that must be met for the new buyer to come on board as new franchisee. The franchisor is concerned with protecting the integrity of their existing franchise system and to avoid the situation where a franchise owner attempts to sell the franchise out from under the system, without the franchise, as the business was built up with the franchisor's name and system and good will, and the franchisor expects to receive a return on its investment in the system and training. If you are a selling franchisee,and do not want to sell the business with the franchise, you will be met with very stern opposition to any such proposal. One of the biggest problems for a franchisor, is when the franchisee purports to close and in reality, moves the business down the street and opens under a new name. Franchisors will fight this with all of their legal muscle. Selling franchisees who are counseled to simply sell the assets to a family member not on the franchise agreement, are to be cautioned about such tactics. As an experienced California Franchise attorney, I can tell you that franchisors can and will assert violations of the transfer clause, and win on those actions. Better to negotiate a mutual resolution to the issues, negotiate a mutual buy out of the franchise agreement, or negotiate franchisor-concessions to a new buyer who becomes a successor franchisee. Franchisors are much more willing to spend as much time as needed show the buyer the latest and greatest features and programs that the selling franchisee may have not utilized, and even make financial concessions where there is significant debt involved from the selling franchisee. A franchisor would much rather have a new franchisee who will be excited about the system and programs, and will work with the selling franchisee accordingly.

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