Disclosure Of California Franchise Opportunity to Prospective Franchisees
By Mulcahy LLP on July 29, 2013
All franchisors that are subject to registration in California are required to provide prospective franchisees with a Franchise Disclosure Document (“FDD”), including the California cover page and addendum, all attachments and exhibits, 14 calendar days before the prospect signs a binding agreement with, or makes any payment to, the franchisor or its affiliate.
The 14-Day Waiting Period
The 14-day period begins to run on the date the FDD is (1) physically delivered to the prospective franchisee and the prospect signs and returns the FDD receipt page, or, (2) electronically delivered to the prospective franchisee and an electronic receipt (an “e-receipt”) of the FDD is received from the prospect. The day the franchisor delivers the FDD should not be counted toward the 14 calendar day waiting period.
While no agreements can be signed and no money can exchange hands until the 14-day period is complete, the parties are still free to negotiate the relationship.
The FDD Receipt
The FDD should contain – as its last two pages – two nearly identical receipts (identified as Item 23 of the FDD). The receipts must be completed by the franchisor identifying the applicable issuance date of the FDD and specific information on the “franchise seller.” One copy of the receipt is for the franchisor to retain and the other is for the prospect. After the FDD is physically received by the prospect, he/she must sign and date both receipts and return the franchisor’s copy to the franchisor.
The date identified on the receipt must be the actual day of disclosure – not a different date in an attempt to expedite the sale.
The receipt can be signed manually or electronically.
Possession of a faxed or emailed copy of a manually signed and dated receipt is generally acceptable to start the 14-day waiting period. As a best practice, the franchisor is encouraged to obtain the original signed document from the prospect.
California Department of Business Oversight examiners (formerly, the Department of Corporations) has approved electronic methods for the franchisor to obtain executed e-receipts from prospects. The most common of these approved methods allows the franchisor to include a link on the Item 23 receipt page of an electronic FDD to a webpage that facilitates execution and submission of the receipt.
When using electronic FDD’s, the franchisor should employ software that requires the prospect to open each portion of the FDD before he/she can locate and complete the e-receipt.
Post-Disclosure Changes to the FDD
California requires franchisors operating within its borders to update their FDD both on a regular basis, and anytime a material change occurs to the nature of the franchised business being offered.
If the franchisor is in the process of updating its FDD, and it has already provided disclosure to a prospect under the prior FDD, the franchisor may close that deal until either (1) California approves the new FDD, or (2) date the prior FDD expires, whichever occurs first.
However, if the franchisor makes material changes to its FDD or related agreement(s) following its initial disclosure to a prospect, the prospect must be re-disclosed with the updated FDD – restarting the 14-day waiting period. A material change can include, for example, changes to the terms of the agreement, including the fee structure, investment required, territory size, territorial rights, or substantive changes involving the franchisor, including, significant litigation involving the franchisor and changes to the franchisor’s ownership or management team.
No additional waiting period is necessary when changes to the agreement were negotiated by the parties and made by the franchisor at the franchisee’s request. As a best practice, however, California franchisors should avoid negotiating changes to their standard franchise agreements at the request of individual franchisees. These changes must later be filed with the State and be made available to new prospects – potentially resulting in future expense and headache for the franchisor.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact Mulcahy LLP.