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Posts tagged "franchise disclosure document"

Can My Franchisor Make Me Participate in Groupon?

A recent client came to me with the issue that their Franchisor is "forcing them" to participate in a network wide Groupon ad, which will in effect cost my client $5000 in lost revenue, and in which she absolutely does not want to participate. Further, the Franchisor claims he (the CEO) can sign for my client if she refuses to sign. She (and many of the other franchisees) are up in arms about this. After reviewing her Franchise agreement and the Franchise Disclosure Document, I confirmed that there is nothing in either document which states this obligation. The Franchisor's position is that this is "marketing method" that they have every right to require. Not so fast. Contractual obligations must be in the contract I.e. the franchise agreement, or at a minimum disclosed in the Franchise Disclosure document as being something the franchisor may require. Furthermore, signing the franchisee's name to something which the franchisee is (allegedly) required to sign, must also be authorized in the franchise agreement. In this situation the franchisor is way out of line in both its position and its claim for authority to sign on behalf of the franchisee. Unless there is a specified contractual obligation, any discounted programs or promotions in a franchise system MUST be optional and for "participating locations only." Franchisees may not be "forced" to participate in a discount or promotional program without their agreement, or if part of a cooperative advertising group, in accordance with the rules of that cooperative. And the Franchisor simply can NOT sign a franchisees name to something, without an express power of attorney or other authorization. Do not be intimidated by a franchisor's insistence they are correct. Seek counsel from an experienced franchise attorney to determine your rights.

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.

My franchisor will not approve the sale of my franchise to a qualified buyer.

The franchise agreement contained in the Franchise Disclosure Document or FDD generally has detailed provisions for the approval process of a buyer of your franchise, but a franchise agreement can be more vague and just say within a reasonable period of time. Sometimes the franchisor will take more than a reasonable time in attending to this matter for a multitude of reasons. Perhaps the buyer is not exactly what they want but can not really deny the qualifications. Perhaps the longer the franchisor delays the more fees you rack up they will demand at closing. Perhaps they want to buy the franchise back from you but do not like the terms they would have to meet and want your buyer to go away so they can make you a lower offer. All of these actions are unreasonable actions potentially causing a franchisee damages. If this is happening to you, an experienced franchise attorney can help you make the appropriate demands onto the franchisor and outlining your rights and potential damages. Franchisors generally will not take your complaints too seriously when coming from you the franchisee, but should take those demands from an experienced franchise attorney representing you very seriously. Where there are very real damages (lost a good buyer), the matter becomes must more serious and the Franchisor does need to understand the legal ramifications of the inaction.

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:

What Can I Do When My Franchisor is Competing Against Me?

Competition from a franchisor can be devastating to a franchisee, whether it's from distributing competing services or products through alternative channels, or from placing other franchised or company owned locations in an area too close to the franchisee. In these situations it is imperative you have a California Franchise Attorney review the franchise disclosure document you received, as well as reviewing the actual facts of your situation. Even the most "air tight" franchise agreements" which allow the franchisor to compete in the way that is happening, does not end the story. Every contract carries with it a "Covenant of Good Faith and Fait Dealing" which means that despite what the contract states, if the actions are such that they are carried out in a manner that either significantly impairs or interferes with the purpose of your contract, the franchisor can be held liable for your damages. If this is happening to you, do not hesitate to call me to determine your rights and options. There are solutions which you will allow you to maintain your franchise business and get paid the fair royalties on the competing actions, or you may seek to terminate your franchise agreement. Call me today for a strategy session to see how I can help you.

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.

How long does it take to get registered to sell franchises in California?

Assuming you have a fully prepared Franchise Disclosure Document which complies with California franchise law submitted with your application, it takes generally between 2-6 months after submitting the application to gain approval and be registered to sell franchises in California, depending on how busy the franchise examiners are and how many new franchisors have applied the same month you do. Generally you can expect to receive the initial reply within 30-60 days, which will contain any minor (or major) changes that your assigned examiner requires with any questions the examiner may have about the audited financial statements. A prompt reply by the franchisor (or franchisor's experienced California franchise attorney) will get you back in the queue for quicker re-review and approval. There may be numerous response back and forth before the application gets approved, or it can fly through easily (or it can be denied if there are too many deficiencies). Different examiners have different things they look at, and some are more detailed than others. If there are no significant problems, then 3-4 months would be a good timeframe to expect approval of your registration.

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