California Franchise Law
California is a franchise registration state. California Franchise Law requires franchisors to register their FDD with the California Department of Financial Protection and Innovation. The initial FDD registration fee is $675 and the FDD renewal fee is $450. Registration expires 110 days after the end of the franchisor’s fiscal year end and requires annual renewal.
What qualifies as a franchise under California law is broadly defined to include all written or oral agreements where (a) an individual, referred to as a franchisee, is granted the right to sell or distribute goods or services under a "marketing plan or system," (b) the operation of the franchisee's business is substantially associated with or identified by the franchisor's trademark, and (c) the franchisee is required to pay a franchise fee for the right to enter into the relationship. California law broadly defines what qualifies as a franchise fee and includes payment for goods and services.
To learn more about registering your FDD with the California Department of Financial Protection and Innovation and how we can help get you registered, give us a call at (718) 979-8688 or contact us.
California Franchise Law and FDD Registration FAQs
Who Regulates Franchises in the State?
The Department of Financial Protection and Innovation (DFPI) regulates and oversees the enforcement of California’s Franchise Investment Law and the registration of FDDs.
What Should I Include with My Initial Franchise Application?
The initial franchise application should include:
Filing fee of $675, payable to the Department of Financial Protection and Innovation ;
Cover letter clearly stating the name of the applicant, the Organization (Org) Id number if known, and the franchisor's fiscal year-end date;
Uniform Franchise Registration Application and a signed and notarized Signature Verification Page and Corporate Acknowledgment (by an officer or general partner of the franchisor, or an individual with power of attorney if the appropriate resolution is attached);
Customer Authorization of Disclosure of Financial Records;
Uniform Consent to Service of Process (not required for California entities);
Supplemental Information Page;
Sales Agent Disclosure Forms;
Franchise Disclosure Document in plain English with all exhibits including the Franchise Agreement;
California State addendum;
Audited financial statements, with a manually-signed consent by the certified public accountant or firm that audited the financial statements;
Internet Ad Exemption Notice;
Guarantee of Performance or other Financial Assurances (if required/needed).
Visit the California Department of Financial Protection and Innovation Franchise Forms and Applications page to download many of the forms required for FDD registration and renewal.
What Are the Fees for Franchise Applications in California?
The initial FDD registration fee is $675 and the annual renewal fee is $450.
Where Is the Registration Application Filed?
Your California FDD registration and renewal applications must be filed with the "California Department of Financial Protection and Innovation" at the following addresses:
320 West 4th Street, Suite 750, Los Angeles, CA 90013-2344;
One Sansome Street, Suite 600, San Francisco, CA 94104-4448; or
2101 Arena Blvd., Sacramento, CA 95834
The registration application must be accompanied with all required forms, including a cover letter that contains specific acknowledgments outlined in the next paragraph.
What Must Be Included in the Registration Application Cover Letter?
When submitting your application you must include all fees and required forms, including a cover letter that acknowledges (a) whether or not any required documents or exhibits will be submitted at a later date, (b) if the "franchisor offered or sold securities in California under the California Corporate Securities Law of 1968" and, if, so describing such transactions and indicating whether the securities were qualified or exempt, (c) disclose the date of the franchisor's fiscal year-end, and (d) acknowledge that the California "registration will generally end 110 days after the date of the franchisor's next fiscal year".
Does California Law Require State Specific Amendments to the FDD?
Yes. The California Franchise Investment Law and the regulations issued under this law have imposed additional disclosure obligations that require franchisors to include a California state specific addendum to the FDD. The California state specific addendum will allow for a multi-state compliant FDD while addressing the additional disclosure obligations that apply under California law.
Typical provisions included in the California State FDD addendum include mandatory notices related to the California Franchise Investment Law and disclosures about legal provision such as forum selection and non-compete clauses that may conflict with California law. Franchisors and their legal counsel should review the Guidelines for Franchise Registration issued by the California Department of Business Oversight for a detailed review of required FDD addendum provisions.
What Financial Statements Are Needed for Registration?
Your application should include the franchisor's financial statements audited by an independent certified public accountant. The financial statements required to be filed include:
A balance sheet with a date that is within 90 days prior to the application filing date;
Profit and loss statements for each of the 3 fiscal years preceding the date of the balance sheet;
Profit and loss statements for the period between the close of the last fiscal year and the date of the balance sheet.
Does California Impose Financial Assurance Requirements?
Yes, California is one of the franchise registration states that imposes financial assurance requirements. During the FDD registration and renewal process the California state examiner will review the financial statements of your franchise company and if the examiner determines that you possess insufficient shareholders' equity or working capital your FDD registration will be conditioned on the satisfaction of a financial assurance requirement. Common financial assurance requirements include your agreement to defer the initial franchise fee until your franchisee has opened for business, escrowing the initial franchise fee, or the posting of a bond. Many times you will have the ability to choose between the three of these options however, in practice, deferral of the initial franchise fee is the most expedient and available option for start-up and emerging franchisors.
How Long Will It Take for My Registration Application to Be Approved?
How long it will take to obtain registration in California will depend on the quality and thoroughness of your FDD and registration application, and how quickly you respond to comment letters from the examining attorney assigned to review your application.
Assuming that you sent a complete FDD registration application, California applies an automatic effectiveness standard where, technically, your FDD registration will become effective thirty (30) business days after the filing of your registration application. However, in practice, you should expect that within this thirty (30) day period you will receive a comment letter from a senior counsel at the Department of Business Oversight. The comment letter will “toll” the automatic effectiveness of your registration application (i.e., you will not be registered yet) subject to you updating your FDD and application in response to the examining attorney’s comments.
Unless you receive a registration notice from the State of California, you should never assume that registration has occurred. Once registered, you will receive an "Order of Effectiveness" from the Department of Business Oversight. The Order of Effectiveness will note the date that your registration is effective and the date when your registration will expire.
When Do I Have to Renew My FDD Registration?
You must renew your FDD registration within 110 days of the end of your fiscal year. For franchisors that operate on a fiscal calendar year basis this means that you must renew your FDD registration not later than April 20th of each year. Under Section 31121 of the California Franchise Investment Law, your renewal application must be filed before your registration expires. Otherwise, you will be required to file a new / initial application for registration, which requires payment of a higher filing fee.
Are there Exemptions to California Registration?
Yes, in certain instances there are exemptions to the registration requirements of California’s Franchise Investment Law.
Exemptions include limited circumstances (subject to qualification) involving the "net worth" of the franchisee; the franchise qualifying as a "fractional franchise"; or the "experience" of the franchisee. Before relying on claimed or perceived FDD registration exemption, you must carefully evaluate whether you can apply the exemption with an experienced franchise lawyer.
Learn more about California’s registration exemptions.
What If the Franchise Sale Occurs Outside of the State?
If the franchise sale is to a franchisee that is not a resident of the State of California and relates to a franchised business that will be located and operated completely outside of the State of California, then under Section 31105 of the Franchise Investment law, FDD registration may not be required in California - even if the franchisor is based in the state. Section 31105 of the California Franchise Investment Law states:
"Any offer, sale, or other transfer of a franchise, or any interest in a franchise, to a resident of another state or any territory or foreign country, shall be exempted from the provision of Chapter 2 (commencing with Section 31110) of this part, if all locations from which sales, leases or other transactions between the franchised business and its customers are made, or goods or services are distributed, are physically located outside this state."
Need assistance with California registrations and franchise agreements? Give us a call at (718) 979-8688 or fill out a contact form to learn more.
Can I make Negotiated Changes to a California Franchise Agreement?
Unlike most franchise registration states, a franchisor cannot make negotiated changes to a California franchise agreement unless the franchisor complies with additional notice obligations with the state and to the franchisor's prospective California franchisees. Once a franchisor negotiates the terms of its registered FDD (i.e., negotiates and agrees to terms that vary from terms contained in the California registered FDD) on-going disclosure and notice obligations are placed on the franchisor.
When dealing with negotiated changes to California franchise agreements a distinction should be made between:
(a) negotiated changes that are for the benefit of the prospective franchisee by conferring the prospective franchisee with additional benefits; and
(b) negotiated changes that, on the whole, do not confer additional benefits to the franchisee.
Negotiated Changes Benefitting the Franchisee: If, in the prior twelve months, a franchisor has negotiated and agreed to franchise agreement changes that confer additional benefits to a California franchisee, then under California Corporations Code Section 31109.1 the franchisor must:
Supplement its California FDD disclosures by adding a separate FDD appendix that provides prospective California franchisees with a "summary description of all of the material negotiated terms during the prior 12 month period." The summary should include:
(a) Offering Circular Item Number:_____________________
(b) Description of Provisions in Currently Registered Offering Circular:_____________________
(c) Description of Change: _____________________
(d) A statement that "...copies of the negotiated terms are available upon written request..." and "contact information of the franchisor's representative from whom negotiated terms can be obtained."
When submitting FDD renewal applications the franchisor must certify or declare in an appendix to its application for renewal that it had complied with all of the requirements under California Corporations Code Section 31109.1;
Provide a copy of all negotiated terms to the prospective franchisee within five business days following the request of the prospective franchisee;
Maintain copies of all material negotiated terms for a period of five years.
Negotiated that Do Not Benefit the Franchisee: If the negotiated changes do not, on the whole, confer additional benefits to the prospective franchisee, then under California Code of Regulations, Title 10, Section 310.100.2 a franchisor must:
Provide the prospective franchisee with copies of all Notices of Negotiated Sale of Franchise forms filed with the State of California in the past 12 months, if any;
File a Notice of Negotiated Sale of Franchise form with the State of California within 15 business days after the negotiated franchise sale is consummated;
Before selling another franchise, amend its California registered FDD within the specific FDD Item or an addendum to the FDD, notification of the negotiated changes, stating: "The terms of Item(s) _________ of this Offering Circular have been negotiated with other franchisees. A copy of all Negotiated Sales Notices filed in California in the last twelve months is attached as Exhibit _____."
Provide all future prospective California franchisees with copies of all Notices of Negotiated Sale of Franchise forms filed with the State of California in the past 12 months; and
When submitting FDD renewal applications the franchisor must certify or declare in an appendix to its application for renewal that it had complied with all of the requirements under California Code of Regulations, Title 10, Section 310.100.2(a)(4).
Summary About Making Franchise Agreement Negotiated Changes - California law declares that it is unlawful to offer a California franchise or to a California franchisee unless the franchise offering conforms to the terms of the registered California FDD. California law is extremely technical and stringent as to this point and there are no exceptions for negotiations made to a franchise agreement. Once a franchisor negotiates and modifies the terms of a California franchise agreement, the franchisor will then be subject to additional notice and, potentially, filing requirements. The extent of the notice and filing requirements depend on whether or not the negotiated changes are for the benefit of the franchisee. Either way, once a negotiated change is made, notice must be give to all future California franchisees signing agreements over the next twelve months. For additional information see the California Guidelines for Franchise Registration, link below.
Useful Links Concerning California Franchise Laws
You may find the links to the right helpful regarding California franchise laws.
We also recommend visiting our interactive franchise registration map to learn more about state franchise laws, FDD registration states, and required franchise filings.