New California Franchise Investment Law to Require Third-Party Franchise Seller Disclosures

In order to promote transparency in the ever-expanding world of franchise sales, California is considering new disclosure requirements for third-party sellers of franchise businesses.

Franchise Brokers, Consultants and Sales Organizations

If you are searching for a franchise opportunity that would be a good fit for you, you may talk to a third-party franchise seller.  However, third-party sellers can take different forms.  Franchise brokers and consultants are independent third parties who are paid by the franchisor anytime their candidate buys a franchise.  Franchise brokers and consultants will typically provide a variety of franchise options for a prospective franchisee to consider. 

Franchise sales organizations, in contrast, are typically hired by franchisors to operate as their franchise sales or development department.  They will sell a large volume of franchises and then move on to the next brand.  But do you really know how a third-party seller gets paid, what laws apply to them, or even if you can trust them any more than you would a stereotypical used car salesperson?  Those are the issues California’s new law is meant to address.

Protection for Prospective Franchisees in California

Currently in California, any person involved in the sale of a franchise must be identified in an application with the Commissioner of Financial Protection and licensed either by the Department of Real Estate or by the commissioner as a broker-dealer or agent.  The contributors who worked with California legislators to draft the proposed law, Senate Bill No. 919, hope that the additional obligation of registration and disclosure for third-party sellers will provide a potential franchise buyer with better information about each franchise opportunity they are considering from the outset of their search.

The proposed law is intended to protect prospective franchisees by providing more responsible oversight of the franchise sales process.  The hope is that it will increase a prospective franchise buyer’s understanding of franchising in general as well as the awareness of what and from whom they are purchasing any franchise system.  In our experience it’s rarely franchise brokers and consultants that are the issue.  However, franchise sales organizations have misrepresented franchise offerings, made financial performance representations outside of what is provided in the franchise disclosure document, or sold a franchise to someone who does not meet responsible levels of financial stability to wisely start a business.  We have seen the devastating effects that misrepresentations have been for some of our clients, and franchisors are also affected negatively when this happens.  Currently, New York and Washington already have registration laws; however, California would be the first state to compel third‑party franchise sellers to submit a disclosure document.

Summary of SB-919, The Bill That Adds Third-Party Franchise Seller Registration and Disclosure Requirements

As it reads now, this bill seeks to make it mandatory for franchise brokers to register with California’s Commissioner of Financial Protection and Innovation and to submit a form, called the Uniform Third-Party Franchise Seller Disclosure Form, which would need to be provided to any prospective franchisee before they begin to engage with any broker.  The document would call for the broker to state, among other things, a) their role in the franchise sales process; b) the services they might provide; c) and the ways they might be paid for their services.  Franchise brokers would also have to list a history of litigation against them and the contact information for all franchisees they sold a franchise to anywhere in the United States during the previous five years.

Registration and disclosure would apply to California-based franchise brokers, broker networks and organizations, and franchise sales organizations.  The disclosure requirement will also pertain to those franchise brokers in other states who wish to either sell to prospective franchisees living in California or whose franchised business will be located in California.  The law will not affect franchise sellers who work for a franchisor, sub-franchisor, or franchise affiliates, or other franchisees of the system (unless they operate a franchised broker business).  If passed, the law provides that both franchisees and franchisors would be able to sue violators for damages, and if the violation is willful, a franchisee may also sue for rescission.  The bill is currently before the California Senate’s Rules Committee.  If approved, it would go into effect July 1, 2026.

Recommendations when Working with a Third-Party Seller

When looking for a franchise broker or consultant, do your research.  The International Franchise Association, Business Alliance, Inc, Franchise Brokers Association and the International Franchise Professionals Group are good resources to help you.  From there, it is best to interview a few to get a sense of how they work and what services they provide.

When dealing with a franchise sales organization be particularly careful.  That organization does not necessarily have to deal with the long-term repercussions with selling a “bad” franchise or a franchise to someone who is not qualified for it.  Perform extra due diligence to make sure that the franchise you are interested in is the right one. 

Whether you have been matched to a couple of franchise systems by a third-party franchise seller or you have identified franchise systems on your own, hire an attorney who specializes in franchise law to review the franchise disclosure document with you to analyze whether the system is actually a good fit for you and point out any potential red flags.  At Luther Lanard, we know who the “bad’ franchisors are, and we know how franchising can go wrong, which helps us advise you to get into the right franchise.