Negotiating Franchise Sales In California

One of the most misunderstood (and unpopular) aspects of California’s franchise law is its regulation of negotiated sales. Under the law, if a California franchisee has been given a "special deal" that is not part of the franchisor’s standard offering, then the franchisor may be required to disclose the terms of that deal to subsequent California franchisees during the following year.

Of all the states that have franchise sales laws, California is the only one that so heavily regulates negotiations between a franchisor and prospective franchisee. The Federal Trade Commission and other states, to the extent that they do address the possibility of negotiated changes, give franchisors and franchisees wide latitude to negotiate agreements as they see fit. This hands-off policy encourages free negotiation between the parties, which is consistent with the goals of franchise regulations in general.

 


 While the law was originally intended to permit or even facilitate negotiation, it presents business and economic issues that have resulted in this unintended consequence: Many franchisors refuse to negotiate any terms with California franchisees. Because franchisors may be required to disclose all such negotiated terms, they are less likely to provide a particular franchisee a special deal because they fear others will demand the same terms. As a result, instead of protecting California franchisees, the law arguably disadvantaged them by taking the negotiability out of their deals.

If you do want to negotiate with a California prospect, what should you do to comply with the law? If your negotiation is the first one within a twelve-month period, then you do not need to make any special filing or disclosure to your prospect. After the deal has closed, however, you will need to determine whether the negotiated terms, on the whole, confer additional benefits to the franchisee. This is usually the case.

Depending on how you answer the benefits question, you may need to either prepare a "summary description" of the negotiated terms and provide that description to any California prospects, or you may need to file a "Notice of Negotiated Sale of Franchise" with the California Department of Corporations and amend your franchise disclosure document (see my earlier blog post on this subject for more information about this). In any event, because negotiation with a California prospect necessarily implicates the state’s negotiated sales law, you should consult your franchise attorney to ensure that you remain in compliance.

The purpose of the law is to control favoritism among franchisees by attempting to level the playing field between franchisees that are sophisticated enough to negotiate their contracts and those that are not. However, the law can act as a trap, ensnaring a franchisor that is unaware of its requirements. The problem is a significant one because California state administrators are given wide latitude in the statute to assess penalties for violations, no matter how large or small the amount of actual damage caused to franchisees.

3 comments

  1. Thanks for the article, Matthew. That is one of the those rules designed to help but many times has unintended consequences. What if the franchisor gives “special deals” to a franchisee in Nevada, does the franchisor then have to disclose that to a potential California franchisee?

    Like

  2. John, California’s law only applies to sales that were negotiated with California franchisees (those people who would be covered by California’s Franchise Investment Law). That generally would not include a Nevada franchisee and would not require the franchisor to disclose to a California prospect a special deal negotiated with a Nevada franchisee. The exception to this rule would be where the Nevada franchisee is covered by the CA law due to some special circumstances (e.g., the NV franchisee lives in California or the franchised business is located there).

    Like

  3. Thanks for this good information.
    I like this post.This is very good to know about this topic.I think all must be known about this related topics.I have also some good dealings with the good lawyers in Canada.They all are well established in this area.
    http://www.franchiselaw.ca/

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s