You’ve developed the concept. You’ve protected the IP. You’ve invested in the many upfront costs of franchising. And to protect all your hard work, you conduct due diligence to find the best franchisees.
And if that franchisee wants to sell the franchise to a stranger, you should have almost unlimited veto power, right? Not so in California, where recent amendments to the California Franchise Relations Act (the “Act”) make it significantly more difficult to control who your franchisees are. We recently blogged about other recent amendments, including the requirement that franchisors repurchase certain inventory and other items from franchisees they have legally terminated or not renewed.
Restricting Transfer Restrictions
It is now a violation of California law for a franchisor to prevent a franchisee from selling or transferring a franchise, all or substantially all of the assets of a franchise business, or a controlling or noncontrolling interest in a franchise business to another person unless
- that person does not satisfy the franchisor’s then existing standards for the approval of new or renewing franchisees; or
- the franchisee and the transferree do not comply with the transfer conditions specified in the franchise agreement.
Franchisors are still permitted to exercise their contractual rights of first refusal to purchase the franchise from the franchisee, if such a right exists in the franchise agreement or another agreement. The franchisor must offer to pay the seller an amount equal to the amount offered for the franchise.
If they haven’t already, franchisors must develop standards that they will use to approve new or renewing franchisees. The franchisor must make the standards available to the franchisee within 15 calendar days of receiving notice that a franchisee intends to transfer the franchise (if they are not already readily available). Franchisors must consistently apply the standards to similarly situated franchisees operating within the franchise brand.
A franchisor must notify the franchisee of its approval or disapproval of the transfer within 60 days after receipt of the necessary documentation or as specified in a written agreement between the franchisor and franchisee. If a franchisor fails to disapprove a transfer by the deadline, the transfer is deemed approved.
How franchisors can prepare
Experienced franchise counsel can help franchisors prepare for these and other unprecedented changes to California franchise law. In particular, franchisors should update or prepare written standards for approving new, renewing or transferring franchisees. Franchisors, in consultation with franchise counsel, should also review all language in their California franchise agreements related to transfers and rights of first refusal.