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Encroachment is a Common Issue Between Franchisors and Franchisees in California

Another common issue between franchisors and franchisees is "encroachment". In the Franchise Disclosure Document or FDD, there should be a provision that describes the integrity of the franchisee and the protections (geographical, electronic, product and service offering) that will be put in place to ensure that the actions of the franchisor do not infringe on the territory or integrity of the franchisee and affect the profitability or viability of the franchisee's business. In reality, many franchise markets become overdeveloped and franchisees can be placed too close to one another. Another common scenario involves the development of an "area" or "region", and the franchisor becomes disturbed by the lack of speed in the opening of franchises within the area, or the number of them and decides to place others within that area to increase market penetration.

How can I get out of my franchise agreement?

Many franchisees come to me asking for a way to get out of their franchise agreement. They generally owe money and just want out of the franchise, and have not had any meaningful help from their franchisor or their franchisor has thwarted any recovery by its own failures. This is where I am pretty good at what I do, having been an in-house counsel for 2 decades. The first thing I do is compare the FDD the franchisee received with the FDD and exhibits on file with the California Office of Business Oversight. You would be surprised at how often franchisors mess up on dates, exhibits or just plain give out the wrong disclosure or the wrong California Addendum. Generally neither party knows this until and experienced franchise registration attorney scours the documents. Many times, there are technical violations which in the scheme of things may not seem like a big deal, but a violation of California law is a violation of California law, and depending on the timing, severity, and potential damages caused, remedies include everything up to and including full rescission of the franchise agreement. At a minimum it is the basis for negotiating out of your debt. The point is there are possible solutions that a grieving franchisee may not even know exist without an experienced California franchise attorney on your side.

I am a New California Franchisor, Do I still need an Audit in My Franchise Disclosure Document?

All California Franchisors need audited financial statements in Item 21 of their Franchise Disclosure Document (FDD). However, California has an exception for brand new franchisors:: For your first year you only need unaudited financial statements. They still must confirm to the format requirements of last 2 fiscal years balance sheet and last 3 fiscal years statement of operations. This is a huge benefit to new California Franchisors, in terms of costs and being able to get started franchising right away. The Unaudited financial statements still go in the Item 21 of the FDD, and must be referenced clearly as unaudited. After your next fiscal year end then the regular audited financial statements will be required. Timing can be important since if you are needing the financial statements in your first year around Oct or November,and our fiscal year end is Dec 31, it may make more sense to just wait until end of year to do your first year unaudited report since if it is completed in October for example, you will then need the full audit as of Dec 31. On the other hand, if you completed your first year unaudited statements in Oct, and were approved to sell franchises in Nov, that first registration will be in effect until April 20 so you do have a significant period of time to sell the first few franchises before your renewal is required.

What Kind of Audit do I need as a Franchisor in my Franchise Disclosure Document?

Part of the requirements of the Franchise Disclosure Document require the Franchisors audited financial statements in the form required by both the FTC Rule and your state requirements. Here are the basics:

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.

Are All Franchise Disclosures in California Alike?

The Franchise Disclosure Document (FDD) in California is for all intents and purposes a securities type of document that is designed to outline, or disclose the prospective franchise being offered by the franchisor, the financial and non-financial aspects and obligations involved in the transaction, and the relationship of the parties. This document is designed to provide the franchisee (the investor) with information about the transaction they are considering. The contents of the FDD are mandated by Federal and State laws, which require 23 Items of disclosure information. Certain States, such as California, will have additional disclosures. Every Franchise System's FDD will have an identical table of contents and must disclose the same required information in the same order. The 23 Items include everything from the franchisor history, predecessors, affiliates, officers, directors, litigation, bankruptcy info, upfront fees and ongoing fees costs, restrictions on sources and suppliers, financing, training, marketing and advertising information, computer and site selection requirements, trademark information, and general and specific obligations on both sides. The FDD also contains a listing of the existing franchise units and former units, and several tables of comparative year information of all units (franchised and company owned). The FDD also contains the last fiscal year audited financial statements of the Franchisor with 2-3 comparative prior years numbers. Finally the FDD contains a sample of all the contracts you will be required to sign, including the "Franchise Agreement", which the actual legal contract between the parties in a franchisor / franchisee relationship. Prospective franchisees must receive the entire FDD for at least 14 days, prior to signing the "Franchise Agreement" or paying any money to the franchisor.

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