Are Franchisors Required to Meet Minimum Capital Requirements as a Condition for State Registration?
Yes. Prior to granting registration, certain states including California, Illinois, Maryland, and Washington will evaluate the capital balance of your franchise company. This capital balance will be identified on your franchise company’s balance sheet as “shareholders’ equity.” If the balance of your reported shareholders’ equity is below a certain threshold, then the state regulator will require that you post a bond or that you defer receipt of your franchise fee until the training is complete or the franchisee opens the franchised business. State regulators will typically evaluate whether or not your franchise company possesses sufficient capital to enable you to fulfill your pre-opening obligations to the franchisee. If sufficient capital is not established, the state administrator, as a condition for granting registration, may impose an escrow or impound obligation on the franchisor.
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