Franchise Outlook

California’s Franchise Bill Vetoed

lawGovernor Jerry Brown has vetoed a bill, SB 610, that would have made substantial changes in the relationships of franchisors and franchisees in California.

One of the big changes the bill would have made was in the ability of franchisors to close down or refuse to renew a franchisee’s relationship with the franchise. Right now, the details of the franchisor’s ability to end the relationship are covered in the initial franchise agreement. Often, a franchisor can shut down a franchise for any infraction of the franchise’s rules. They may also be free not to renew the arrangement for any reason, or for no reason.

From the franchisor’s point of view, this protects their company from being harmed by a franchise that fails to provide the consistent branded experience, and also allows them to end an agreement they’re finding unprofitable after the term of the deal ends. Franchisors also mentioned, in the discussions around the law, things like leases that are not renewed by the building owner or which become much more expensive. Factors like these, which are not under the control of either franchisor or franchisee, can create problems for both sides. In some cases, it’s in the franchisor’s best interest to end the agreement rather than to make costly changes.

From the franchisee’s point of view, however, they may have spent years building their business, only to have the rug pulled out from under them. They may feel that their infractions of the rules were not very severe or were not harmful to the brand. They may also feel that they are reaching their own definition of success, and may not agree with the franchisor that their business is not profitable enough to renew. Some franchisees said that franchisors refused to renew because they didn’t want to keep on small business owners who wanted only one franchise, even though they had initially agreed to that arrangement.

The law would also have made it easier for franchisees to sell or transfer their business. Now, franchisees usually cannot even pass on their business to their children without approval from the franchisor. They may put a lot of effort into finding a buyer for their business, only to have the franchisor refuse to accept the buyer they’ve found. For a franchisee who wants to cash out, this can be an extremely frustrating situation.

For the franchisor, however, having to accept a change in ownership may be equally frustrating. Franchisors don’t have to enter into franchise agreements with just anyone; they get to choose the people they want to represent their brands. The new law would have substantially changed that.

Governor Brown said that he wouldn’t sign a bill without stronger evidence that there are actual abuses in the system. Citing concerns about creating new problems in California’s enormous franchise system, Brown asked for more evidence of the “scope of the problem.” He also asked that the two sides of the debate make a greater effort to collaborate. The two sides on this question are completely polarized, and observers have suggested that the law would lead to enormous amounts of litigation — in California and in other sates as individuals in other states looked to the California precedent.

For now, the changes won’t be happening.

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