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My Franchisor is Not Registered in California, Can They Still Sue Me as a Franchisee in California?

Franchisors must register their franchise offering with the California Department of Business Oversight in order to sell franchises in California. If a franchisor was properly registered and properly sold a franchise, but has since become not registered (by not renewing its registration), this means that franchisor can not sell any future franchises in California. It does NOT mean they can not enforce a franchise agreement with an existing franchisee in California. Having said that, if a franchisor is incorporated out of state and failed to register to do business with the California Department of Corporations (and file California tax returns, and pay California taxes), then such company can NOT bring an action in California against its franchisee for any reason. California has laws to protect its citizens, and any company who is doing business in California, without properly registering its corporation or LLC, can not avail itself of the laws and protections afforded by the California Courts. Having a California located franchise IS doing business under California laws since that franchisee pays royalties or other fees, in exchange for the franchise, license and related services. If you are a California franchisee with an out of state franchisor threatening legal action, an experienced California Franchise Attorney, such as myself, can help you determine your rights and options.

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 Do Franchisors Ensure the Present and Future Success of their Franchise?

Successful franchisors are constantly working to improve the quality of the "product" they are offering to the franchisees. The products and services that are offered, the "system" for how they are to be integrated and offered to the market (the heart of a successful franchise), and the support provided to franchisees are areas where franchisors are constantly working for improvement. Work to develop more competitive and effective sources from your suppliers. Franchisors should constantly analyze each component of their own franchise system, looking for ways to reduce cost, leverage economies of scale and increase the quality and quantity of products offered through the franchise network. They are constantly refining the training process and the systemization of their offering to make it easier for new franchisees to learn, implement and successfully provide the products or services offered under the franchisor's banner.

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.

I Want to Sell my Franchise Business Without the Franchise

Many times a franchisee will want to or need to sell his franchise business but without the franchise. This action is always against the strict requirements in the franchise agreement. Franchisors do not want to lose a unit from the network no matter what the reasons are, because that decreases the total number which is a negative statistic for franchisors, and sets a precedent, which the franchisor does not want to set. However, there are ways to negotiate with the franchisor to either mutually terminate your franchise agreement, or buy out of that provision, or otherwise negotiate the issues and address the problem. Sometimes the problem is the franchise brand for some reason is negatively viewed in your area. Sometimes it is the fees associated with a buyer having to sign a new franchise agreement with much higher fees. Sometimes it is the substantial updating that the franchisor would require for the seller or the buyer, which makes the sale unworkable. Whatever the issue is, there are options I can explore with you to determine the best course of action for your situation. Everything is not as black and white as it seems. There is always a solution. Call me today to find yours.

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.

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.

Teachers/Trainers make the Best California Franchisors

So you are considering being a California franchisor? Franchising is about systematizing your business, THEN teaching/training your franchisees those systems. "Systematizing" means to organize every single tiny aspect of your business in some format franchisees can refer to, such as an operations manual-- how to select the size, feel and look of the location, selecting vendors and suppliers, determining initial inventory requirements, placement in the store, employee hiring and management, computer or equipment requirements, marketing and advertising needs, administrative, legal and accounting needs of the business. AND yes, operations. As analogized in my favorite book "The E-Myth, Revisited," just because you're great at baking a fabulous pie, doesn't mean you can franchise pie shops; You're not going to teach your franchisees how to bake a great pie, you're going to teach them how to start and operate a successful pie business. The franchisee will need to understand and oversee all those different parts of running a business. The better You, the franchisor are at teaching and training, the more successful your franchisees will be. And your network!

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