California franchisees moved a major step closer to protection against arbitrary terminations and other key reforms when the International Franchise Association agreed to stop opposing the California Small Business Investment Protection Act, AB 525.
The International Franchise Association reached an agreement with the Coalition of Franchisee Associations, a sponsor of the California franchisee rights bill, to drop its opposition, and the two groups released a joint letter on July 14. According to the letter, “both IFA and CFA made significant concessions in a good faith effort to reach a workable, common sense compromise on behalf of our industry’s nearly one million workers at 82,000 franchise locations which contribute $94 billion in economic output to California’s economy.”
As Nation’s Restaurant News wrote, the amendments franchisees accepted as part of the agreement are primarily “language clarifications” that keep “the main thrust of the legislation in place.”
The bill, if passed and signed, will:
- Allow terminations only if franchisees fail to substantially comply with their franchise agreement. As the Business Journal put it, “In other words, franchisees could not be fired for minor or arbitrary violations.”
- Requires franchisors to pay franchisees for some of their business assets – inventory,
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Nearly three in ten Small Business Administration loans to California franchisees in recent years have failed. That’s according to a new analysis by the Service Employees International Union of over 7,000 loans made to California franchisees over a 20-year period. As the San Jose Mercury News reported, the study shows that franchise owners in California “have a harder time staying current on their loans than in the rest of the nation.”
The failure rate on California SBA franchise loans made between 2006 and 2010 – the most recent period analyzed – is more than double the failure rates in earlier periods. The loans analyzed were made by banks and other private lenders through the SBA’s flagship 7(a) Loan Program.
The failure rate is the percentage of loans to California franchisees that the SBA charged off its books. Such charge offs happen after lenders liquidate all the borrowers’ collateral, which can include their home or other personal assets. Loan failures represent a financial disaster for the borrower, who may have lost both business and personal assets, and a loss for taxpayers, since the SBA has to write off the uncollected value of the loan.
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The California Small Business Investment Protection Act cleared another hurdle on May 14, passing the State Assembly 56-12. The measure next moves to the California State Senate.
The bill’s coauthor, Assembly Majority Leader Chris Holden of Pasadena, said on the Assembly floor that the measure “is necessary because the existing legal protections that govern nearly every other contract agreement do not apply to franchise contracts.”
Referring to his earlier experience as a Subway franchisee, Holden added, “I would never have guessed that I had fewer legal protections than other contractual relationships,” noting that 75 percent of franchisees say they pledged their home, retirement savings, or other personal assets to purchase their business.
The bill, AB 525, protects franchisees against unfair terminations, allows franchisees to monetize their equity when franchisors refuse to renew franchise agreements and protects franchisees’ ability to sell or transfer their units.
One of six Republicans who voted for the bill, Los Angeles area Assembly member Chris Wilk, told fellow members, “when you become a franchisee, you are supposed to be a partner with that corporation, not an indentured servant, and this is a positive first step toward addressing the inequities between small businesses and these multinational corporations.”
Lobbying by franchisees clearly had an effect on the vote count.
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A franchisee rights bill has cleared two committees in the State Legislature and is headed for a vote on the State Assembly floor in May. The California Small Business Investment Protection Act passed the Assembly Committee on Business and Professions unanimously 11-0 on April 28 after clearing the Assembly Judiciary Committee on April 21.
- Bars franchisors from terminating franchisees unless franchisees fail to substantially comply with their contracts, using language found in several other state laws.
- Guarantees franchisees the opportunity to fix most violations before franchisors can terminate them based on those violations.
- Protects franchisees’ rights to sell their business to a qualified buyer so they can retire.
- Requires franchisors in most circumstances to compensate franchisees if they terminate or refuse to renew a franchise.