USA – CALIFORNIA Trends and Developments Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
Opinions are sharply divided about franchising in Cali - fornia. On the one hand, California is a highly popu - lous state with numerous dense and relatively wealthy neighbourhoods that are attractive to franchise sys - tems. Its median household income is one of the high - est in the country. Its desirable climate and diverse geography allow a wide variety of businesses to thrive year-round. It is home to thousands of franchised out - lets and has the highest revenue of any state in the United States. On the other hand, franchising is highly regulated in California, and state regulators are engaged and active with respect to enforcement. Some view the business environment as hostile to businesses. Further, the cost of living is very high in the major metropolitan areas of the state. The successful franchisor in California will have considered each of these elements carefully as it begins operating in the state. Substantial Franchise Regulation As detailed in the California Law and Practice chapter in this guide, the state is considerably regulated. Fran - chisors must carefully comply with registration and disclosure requirements and must ensure that their disclosure documents do not become inaccurate dur - ing the course of registration, lest they be accused of not amending the disclosure as required during the registration period. Like other jurisdictions in the USA that require fran - chise registration (often called “franchise registration states”), regulators in California may impose finan - cial conditions on franchisors with limited finan - cial resources or negative equity, especially newer franchisors, based on franchisors’ audited financial statements. Franchisors can typically choose what financial condition they will accept, including defer - ring collection of fees until a franchisee is open for business, setting up an escrow account and posting a surety bond. In some instances, regulators will accept an undertaking by which the franchisor deposits an amount of money into their bank account and cov - enants not to withdraw any of that amount during the pendency of the franchise registration. Notably, the selected condition may hamper the franchisor’s abil - ity to use initial fees to pay immediate expenses for
pre-opening support, training, payment to franchise brokers, or other expenses. Unlike many franchise registration states, California’s Department of Financial Protection and Innovation (DFPI) is extremely active with respect to initiating investigations. In 2025, the DFPI entered into and pub - licly shared 14 consent orders for franchise law viola - tions, and between January and September 2026 it had entered into and shared 11 consent orders. There are two principal triggers for a DFPI investigation: • a consumer complaint made directly to the agency; or • a filing by the franchisor revealing some prior mis - take, misrepresentation or other issue of concern to the agency. A third trigger is the franchisor’s own self-report of its violation to the agency. Common bases for investigation and consent orders are: • franchisors that sold franchises without a registra - tion or disclosure document, whether or not the franchisor understood it was selling a franchise at the time; • franchisors that engaged in misrepresentation based either on an inaccuracy in the disclosure document or a representation that contradicted the disclosure; and • financial performance representations other than the information presented in the disclosure docu - ment. Because of the regularity with which investigations occur in California, franchisors that have non-compli - ant incidents run a real risk of being investigated by California regulators, often resulting in a civil fine and a required consent order under which the franchisor agrees not to engage in further violations of the Cali - fornia Franchise Investment Law. In some instances, the franchisor may also be ordered to offer rescission and refund of fees to affected franchisees.
113 FRANCHISING 2026
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