USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
4. Other Requirements 4.1 Past-Profitability Requirements There is no requirement to demonstrate profitability in order to offer or sell franchises. California does not require franchisors to demonstrate that a franchised business has operated profitably for any minimum period or at any minimum number of locations prior to the offer or sale of franchises. New systems are therefore free to register and sell fran - chises in California without an established record of profitability. Franchisees should exercise care and substantial diligence when investigating franchise opportunities that do not disclose financial perfor - mance and that do not have existing franchisees in the system who are willing to disclose their financial picture. 5. Duration, Renewal and Termination 5.1 Duration of a Franchise Agreement There is no required minimum or maximum franchise term. 5.2 Franchise Renewal Under the CFRA, a franchisee has a statutory pro - tection against non-renewal but not an unconditional right to renew. A franchisor must provide at least 180 days’ written notice and satisfy one of the statutory grounds for non-renewal, including: • allowing the franchisee an opportunity to sell the business; • having grounds that would permit termination under the CFRA; • withdrawing from the relevant market; or • failing to reach agreement on renewal terms that are substantially consistent with those then being offered to similarly situated franchisees. California does not provide a general right to goodwill compensation following a lawful non-renewal. How - ever, the franchisor may be required to re-purchase certain inventory, supplies, equipment, fixtures and furnishings, and an unlawful non-renewal may expose
the franchisor to liability for the fair market value of the franchised business and other damages. 5.3 Termination of the Franchise Agreement California significantly restricts a franchisor’s ability to terminate a franchise agreement. Under the CFRA, a franchisor may not terminate a franchise before the expiry of its term except for good cause. Good cause is limited to the franchisee’s failure to substantially comply with the lawful requirements of the franchise agreement after receiving at least 60 days’ prior notice and a reasonable opportunity to cure. The cure period may not exceed 75 days unless the parties separately agree to an extension. The CFRA also recognises circumstances in which a shorter cure period or immediate termination is per - missible. These include: • bankruptcy or insolvency; • abandonment of the franchised business; • material misrepresentations in acquiring the fran - chise; A franchisee that fails to pay amounts owed to the franchisor or its affiliate may be terminated if the amounts remain unpaid for five days after written notice, while certain violations of law are subject to a ten-day period following notice of non-compliance. Lawful termination may also require a franchisor to re-purchase certain inventory, supplies, equipment, fixtures and furnishings purchased by the franchisee from the franchisor or its approved suppliers. How - ever, this re-purchase obligation does not apply to personalised items, items not reasonably required to operate the franchise, or items for which the fran - chisee cannot convey clear title and possession. It also does not apply in specific circumstances, includ - ing where the franchisee declines a bona fide renewal offer, retains control of the principal business location or mutually agrees with the franchisor to terminate or not renew, or where the franchisor withdraws from all franchise activity in the relevant geographic market. A franchisor that terminates a franchise in violation of the CFRA may be liable for the fair market value of • repeated defaults; and • certain criminal conduct.
107 FRANCHISING 2026
C HAMBERS.COM
Powered by FlippingBook