Under the California Franchise Investment Law, a franchise is defined as a commercial business arrangement between two or more persons where a franchisee is given the right to use the franchisor’s trademark, trademark, trade name, marketing plan and advertising. If a company is defined as a franchise, the law requires a franchisor to file the correct documentation in order to offer the business for sale. In California, franchise law is heavily regulated so it is important to be aware of common mistakes.
One criterion of a franchise is providing a registered trademark to a buyer. If you are thinking of franchising your business, do not sell until your primary trademarks are registered with United States Patent and Trademark Office. Failure to register can create unnecessary risk of litigation. Be sure to develop a strong trademark. Using “descriptive” words affords less protection than using arbitrary words. Even after the sale of your franchise, be sure to periodically evaluate existing marks and registrations as your business develops.
Franchise Disclosure Document
The primary document required under the California Franchise Investment Law is the Franchise Disclosure Document (FDD). Franchise sellers are required to provide potential buyers with an FDD at least 14 calendar days prior to the execution of the franchise agreement. The FDD covers a great deal of information regarding anything relevant to the business, the franchisor, or the franchise system that may be reasonably expected to impact the price of the franchise or the decision to acquire it. The franchisor must register and file the FDD with the State of California before offering or selling a franchise.
One of the most common mistakes franchisors make is failing to register with the California Commissioner of Corporations before offering franchises for sale. Many franchisors also make the mistake of leaving out or implying information. Franchisors should be sure to include all information on the business and backgrounds of directors and officers. A franchisor should be careful not to provide any information which could be used to project future earnings because earnings at each location will vary and the franchisor does not want to expose himself or herself to liability for false or inaccurate statements about projected earnings.
The Accidental Franchise
Companies looking to expand and offer their trademarked goods or services may accidentally find themselves crossing the line between franchises and other commercial arrangements, such as licensing or distributorship agreements. A business may be considered a franchise where there is a substantial association between a franchisor and another business enterprise. Because of the ambiguity of this definition, many businesses may be considered franchises. If your business provides advice or training regarding the sale of your product, exercises significant control over the conduct of the other business, or grants exclusive rights to sell your product, your company may be seen as having a “substantial association” and may therefore be considered a franchisor. Licensing and distributorship agreements are between two independent companies operating under their own trademarks that are not significantly involved in each other’s operations. While there is little regulation over licensing or distributorship agreements, franchises are heavily regulated. If your company can be categorized as a franchise by law, then failure to adhere to franchise law can result in litigation and penalties.
The California Franchise Investment Law is complex to navigate. For assistance with trademarking your products or services, writing a Franchise Disclosure Document or determining the type of commercial arrangement that is best for your company, please contact Larry Horwitz at firstname.lastname@example.org.