What Are the Legal Steps to Take When Launching a Franchise?
Starting a franchise is an exciting opportunity to bring a proven business model to life. However, the legal process of launching a franchise can quickly spiral into a web of complicated contracts, compliance requirements, and intellectual property considerations.
At the Law Offices of Steven E. Springer, we help potential franchisees understand and manage the legal framework governing their franchise investments. With over 30 years of combined experience, we have deep knowledge of local and state laws and a keen understanding of what it takes to make franchises successful.
With offices in Morgan Hill, Fremont, and San Jose, California, we serve clients throughout Santa Clara County. Call our office for free consultations so you can discuss your franchise plans with experienced attorneys. In this blog, we aim to provide an overview of the steps you should take when starting a franchise in California.
Your Guide to Starting a Franchise in California
Starting a franchise in California is no small feat. It typically involves several legal steps that are essential to making sure your business runs smoothly. The steps you should take to set up and franchise in California include the following:
1. Perform Due Diligence on Your Franchise Agreement
The franchise agreement is the foundation of the entire operation. This legally binding document specifies the rights and obligations of the franchisor and you, the franchisee. Some key areas of a franchise agreement that you should look over carefully include:
Fees and royalties: How much will you owe upfront? What percentage of your revenue will go toward royalties?
Territorial rights: Have you been granted exclusive rights to operate your business in a certain geographic area?
Operational standards: What rules have the franchisor put in place regarding hours of operation, branding, and staffing?
Before you sign, make sure you understand every term. Many clients realize too late that the fine print has hidden restrictions or costs. Together, we’ll review the agreement and identify areas that may need clarification or negotiation before proceeding.
2. Register and Comply with California Franchise Laws
California has some of the most stringent franchise regulations in the country. The California Franchise Investment Law (CFIL) mandates franchisors to register their Franchise Disclosure Documents (FDDs) with the California Department of Financial Protection and Innovation before offering a franchise to potential franchisees. The key California franchise laws you should be aware of include:
Franchise Disclosure Document (FDD): By law, the franchisor must provide potential franchisees with an FDD at least 14 days before signing any contract. This document includes essential information on the business model, fees, the franchisor’s financial history, and potential risks.
Good faith requirement: Franchisors and franchisees must act in good faith when negotiating and executing franchise agreements. Misrepresentation or withholding of relevant facts can lead to penalties or legal disputes.
Rescission rights: If a franchisee does not receive proper disclosures as required by the CFIL, they can rescind their agreement and seek restitution.
At the Law Offices of Steven E. Springer, our attorneys stay up to date on California franchise laws. We’ll make sure you understand how local regulations apply to your franchising plans.
3. Consider Intellectual Property Protections
Your franchise will likely involve the use of licensed trademarks, patents, or copyrighted materials tied to the franchisor’s brand. Part of your legal prep involves verifying that all intellectual property (IP) rights are properly documented in the franchise agreement. Some pertinent questions you should ask include the following:
What trademarks will I be able to use, and how are they protected?
Who is responsible for initiating or managing legal action if the IP is infringed upon?
What happens to my right to use the IP if the agreement expires or is terminated?
For California franchises, where businesses often interact with tech-heavy industries, safeguarding IP rights is especially important. At our firm, we help franchisees assess the strength of these protections so that you can confidently display and use your franchisor’s brand.
4. Secure Proper Business Licenses and Permits
Every California business, whether franchise or independent, must obtain the necessary licenses or permits before opening its doors. Depending on the type of franchise, these might include health permits for food and beverage establishments, zoning permits, or additional certifications.
Santa Clara County is particularly rigorous when it comes to business permits. For instance, franchises in Morgan Hill might face different licensing requirements compared to those in Fremont or San Jose due to local ordinances. Understanding these regional regulations allows us to help businesses avoid fines and delays caused by overlooked licensing steps.
At our firm, we can help you determine whether you need a single license or apply for multiple permits across county lines. Regardless of your franchise’s location, our team can help simplify the process.
5. Establish a Legal Entity for Your Franchise
Setting up a legal business protects your personal assets and defines how your franchise handles taxes. California offers several entity options, including sole proprietorships, limited liability companies (LLCs), corporations, and partnerships.
For franchises, LLCs and corporations are generally a better fit because they separate your personal and business liabilities. Some important considerations when structuring your business entity include the following:
Tax implications: Different entities come with different tax obligations. We’ll help you choose one that minimizes your tax liability while complying with California regulations.
Liability protection: Establishing a formal entity buffers your personal assets from being claimed in case of legal disputes or debts associated with your franchise.
Once we determine a suitable entity for your needs, we can help you file the paperwork with the Secretary of State and comply with tax and financial reporting requirements.
6. Review Financing Options and Operational Costs
Launching a franchise often requires significant startup capital. This may come from personal savings, bank loans, or investor backing. Unfortunately, misjudging your costs can create financial challenges later.
We will help you evaluate your financial risks. From comparing financing options to identifying potential cost overruns, we will help create a stable foundation for your business. Lenders often want to see a robust business plan before approving loans, so we can help you create a plan that showcases your franchise’s potential to succeed.
Franchise Attorneys Serving Santa Clara County, California
At the Law Offices of Steven E. Springer, we have spent over 30 years helping businesses throughout Santa Clara County, including Morgan Hill, San Jose, and Fremont. Our attorneys provide personalized legal guidance that’s accessible, thorough, and driven by your goals. We are available when you need us as we work toward successful outcomes. Whether you’re considering your first franchise or expanding your business, call us for a free consultation.