You May Need More Capital To Offer and Sells Franchises in California

There are no hard and fast rules about how much capital or money a franchisor is required to have in the bank.  If a franchisor has limited amounts of funds in the bank, a state may require the franchisor to include a risk factor on the state cover sheet of the franchise disclosure document [FDD].  For new franchisors or franchisors that have limited amount of funds, a state may require a franchisor to defer initial franchise fees, initial escrow fees, or secure a bond. 

Based on a new policy, California is requiring Franchisors to have additional capital.

However, based on recent comment letters and conversations with the examiners in California, California requires something new.  Based on a new policy, California requires Franchisors to have additional capital.  The amount required is still convoluted.  However, when registering in California, franchisor should plan on having an amount equal to the initial franchise fee in the bank.  Without sufficient funds in the bank, the state of California may refuse the franchise registration application. 

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The New and Expanded Franchise State Cover Page

On May 19, 2019, the NASAA [North American Securities Administrators Association] Membership issued instructions for the new Franchise Disclosure Document [FDD] state cover page.  The state cover sheet is expanding.  It is now 3 pages, not just one.  The pages include:

  • How to Use This Franchise Disclosure Document
  • What You Need to Know About Franchising Generally
  • Special Risk(s) to Consider About This Franchise

The first page, How to Use This Franchise Disclosure Document, is a table with 8 questions in the first column and in the second column, a cross-reference in the franchise disclosure document.  A narrative above tables states the mission of the table. The narrative reads:


Here are some questions you may be asking about buying a franchise and tips on how to find more information:

The question includes:

  1. How much can I earn?
  2. How much will I need to invest?
  3. Does the franchisor have the financial ability to provide support to my business?
  4. Is the franchise system stable, growing, or shrinking?
  5. Will my business be the only [XYZ] business in my area?
  6. Does the franchisor have a troubled legal history?
  7. What’s it like to be [an XYZ] franchisee?
  8. What else should I know?

The next page, What You Need to Know About Franchising Generally, is 7 general statements about franchising on the topics including:

  1. Continuing responsibility to pay fees.
  2. Business model can change.
  3. Supplier restrictions.
  4. Operating restrictions.
  5. Competition from franchisor.
  6. Renewal.
  7. When your franchise ends

The final page, special risk factors page, is kin to the risk factors required by the prior version of the state cover sheet. 

Franchisors must comply with the new state cover page requirements by January 1, 2020.