Buying a Franchise

California’s New Law

California Governor Jerry Brown signed Assembly Bill 525 into law on October 11, 2015. The provisions of the law include many new requirements for franchisors:

  • They must provide a written explanation when they terminate a franchise agreement.
  • They must repurchase the franchisee’s assets (less depreciation) when they end a franchise agreement, though not if the franchisee ends the arrangement.
  • They may only terminate franchisee agreements for “substantial” infractions of the agreement.
  • They must allow franchisees 60 days to correct the infraction.
  • Franchisees who lied when they acquired their franchise (about the net worth, for example), may have their franchise agreements terminated.
  • Franchisors may end the agreement if franchisees declare bankruptcy or fail to make required payments, or if the franchisee abandons the franchise.
  • They may also end the agreement if there is a danger to pubic health or safety from the franchise.
  • Franchisors may also terminate the franchise agreement if the franchisee behaves in ways that may damage the reputation of the franchise, including being convicted of crimes related to the franchise.
  • Franchisees may sell their franchise to any buyer who meets the franchisor’s stipulated qualifications.
  • Franchisors may have first refusal of a franchise if the franchisee desires to sell it.

These requirements are expected to provide greater protection for franchisees who face the possibility of having their franchise agreements terminated. Some franchisees have claimed that their agreements were terminated because the franchisor wanted to take over their location or offer it to a mutli-unit franchisee. Others have claimed that their agreements were ended “on a whim.” The new law will prevent any terminations of this type.

At the same time, other franchisees have been worried that franchisees who were breaking the agreement would threaten the brand. If your cleaning franchise suffers from negative reactions to the same franchise in another town, you don’t want that location to continue its bad practices for another 60 days. The new law’s clause saying that a threat to the reputation of the franchise is grounds for termination offers protection to other franchisees.

Franchisors may be better protected in cases where a franchisee breaks labor laws or in some other way threatens the franchise.For the most part, however, this law is intended to limit what franchisors can do.

There are some very specific details in the new law — for example, a franchise can only stay closed for five days after an earthquake before they are judged to have abandoned their franchise — but the major provisions focus on the requirements and limitations for terminating franchise agreements.

In general, the new law will only apply to franchise agreements or renewals signed on or after January 1, 2016. In the case of franchise agreements which have no ending date, the new law may apply immediately.

Observers are guessing that franchisors will update their franchise agreements in light of the new law. If you’re investigating franchise business opportunities in California, this is certainly a time when you should consult a lawyer to be sure you completely understand your rights and responsibilities as a franchisee.

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