How California’s New Disclosure Law Could Affect Franchise Sales Nationwide

By temporary On Oct 6, 2024 18

California recently made a significant move in the franchise industry with Governor Gavin Newsom’s signing of Senate Bill 919 (S.B. 919). This bipartisan legislation introduces new registration and pre-sale disclosure requirements for third-party franchise sellers, including brokers, broker networks and franchise sales organizations. The bill aims to enhance transparency during the franchise sales process, an area that has long been under scrutiny.

The International Franchise Association (IFA) was a vocal supporter of this legislation, citing its alignment with the principles outlined in the IFA’s Responsible Franchising initiative. By focusing on transparency and disclosure, S.B. 919 is a step toward strengthening the franchisee-franchisor relationship.

“By improving information available to prospective franchisees during the pre-sale process, the legislation strengthens the foundation on which the franchise relationship begins,” Matt Haller, president and CEO of the IFA, said in a statement. “We hope this law will serve as a model for Responsible Franchising in other states.”

What this means for franchise brokers

Franchise brokers play an essential role in the industry by connecting franchisors with potential franchisees. Their fees are often tied to their ability to bring qualified candidates to the table. In states like New York and Washington, third-party franchise brokers are already subject to registration requirements and now, with S.B. 919, California joins that list.

The new law amends the California Franchise Investment Law (CFIL), adding specific annual registration and pre-sale disclosure mandates for franchise brokers and networks. These include yearly registration, where brokers must register annually and pay applicable fees, and new disclosure requirements, including requiring third-party franchise sellers to deliver a disclosure document to prospective franchisees. This document will cover essential information, including litigation history, compensation structure, the industries they represent, and the brands they sold franchises for in the previous year.

A model for other states?

The IFA has expressed optimism that S.B. 919 could become a model for other states seeking to enhance consumer protections in the franchise space. California is a major player in the U.S. economy, and its moves often set the tone for future legislative trends. If other states follow suit, third-party franchise brokers nationwide may soon face a new era of increased accountability and transparency.

For the franchise industry, S.B. 919 represents a critical shift toward more responsible practices. It ensures prospective franchisees can access the information they need to make sound investment decisions. As the law rolls out over the next two years, franchise stakeholders nationwide be watching closely.