California Just Took a Big Step Towards Responsible Franchising

The California Senate passed Senate Bill 919 last week, a piece of legislation that extends disclosure requirements to third-party franchise sellers, including brokers, broker networks and franchise sales organizations. The bill, which received bipartisan support, will strengthen franchise relationships by providing more information to prospective franchisees.

“Third-party franchise sellers play a vital role in the franchise model, and this legislation provides greater clarity of the various parties engaged in the franchise sales process to prospective franchisees,” Matthew Haller, IFA president, said in a statement. “Responsible franchising includes improved disclosure and ultimately leads to stronger franchise relationships in the long term.”

The IFA defines “third-party sellers” as “individuals or companies that are engaged (whether directly or indirectly) in the business of offering franchises on behalf of a franchisor.” These sellers have various titles, including brokers, franchise brokers, broker organizations, franchise sales organizations, business coaches, advisors, franchise experts and sales consultants.

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California Franchise Investment Law

The legislation, S.B. 919, amends the California Franchise Investment Law (CFIL) to require third-party franchise sellers to register annually and provide pre-sale disclosures. It builds on IFA’s principles of responsible franchising and aims to fortify the franchise relationship from the start of the sales process.

Key provisions of the proposed amendments to the CFIL include several significant changes aimed at increasing transparency and accountability for third-party franchise sellers. First, third-party franchise sellers must file an annual registration, similar to existing requirements in New York, ensuring ongoing compliance and oversight.

Second, prospective franchisees must receive a brief disclosure document containing essential information, including general information about third-party franchise sellers, suggested questions for prospective franchisees to ask, and the contact information and state of formation of the third-party franchise seller.

The document will also detail the seller’s professional experience over the past five years, any certifications or continuing education, litigation history, types of services performed, the general compensation structure, industries represented, and the number of brands within each industry. Additionally, it will provide a list of franchises sold during the prior calendar year.

The Senate passed the legislation with a vote of 36-1, and it will now move to the California Assembly for further consideration.

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Responsible franchising

Amid the growing responsible franchising initiative — and the accompanying grassroots movement in the industry — the IFA recently released recommendations to enhance and strengthen franchising through increased transparency on all sides of the sales process.

“Robust pre-sale disclosure is the bedrock of responsible franchising,” Haller said in a statement following the release of the guidelines. “These policy recommendations would modernize current disclosure requirements.”

The recommendations included simplifying the federally required Franchise Disclosure Document, requiring prospective franchisees to conduct thorough due diligence and increasing third-party disclosures.