Fear vs. Fact: The California Small Business Investment Act
The California Small Business Investment Protection Act (AB 525) will help small-business franchise owners stay in business and contribute to our state’s economy. Without it, the owners of over 82,000 enterprises in California could lose their livelihoods if they break one of countless rules contained in thousands of pages of corporate manuals.

Big government did not create these rules. Rather, it’s large franchisor corporations that impose myriad minute operating requirements on their franchisees. The Small Business Investment Protection Act will prevent franchisors from unfairly putting franchisees out of business and protect franchisees’ ability to sell their business or pass it on to family members.

In the past, opponents of franchisee rights have tried to use scare tactics to derail the debate. Here are the facts:

Fear: The California Small Business Investment Protection Act will destroy franchising in California.

Fact: The California Small Business Investment Protection Act does not fundamentally change the franchising business model. Rather it gives franchisees the right to keep their businesses unless they fail to substantially comply with the franchise contract. Numerous other states have laws that protect franchisees in the same way.

Fear: The California Small Business Investment Protection Act puts California jobs and the growth of franchising in our state at risk.

Fact: It is the franchisees, the small-business owners, who actually create the jobs in franchising – not the corporate franchisors, usually headquartered out of state. Those small-business franchisees need protections from unfairly losing their businesses in order to keep adding to the over 925,000 jobs in California’s franchised businesses. The California Small Business Investment Protection Act ensures that small business owners have the stability to keep growing and creating jobs.

Fear: The California Small Business Investment Protection Act will erode franchise brand standards, and consumers will suffer.

Fact: The California Small Business Investment Protection Act allows franchisors to protect quality standards while safeguarding franchisees against being unfairly forced out of business.

Fear: The California Small Business Investment Protection Act will force California small businesses to close.

Fact: Numerous states have laws with the same or similar provisions as the Small Investment Protection Act. There are plenty of 7-Elevens in New Jersey; lots of McDonald’s in Arkansas; and no lack of H&R Block offices in Minnesota, to name just a few of the states that offer franchisees the same kinds of protections as those in the Small Business Investment Protection Act.

Fear: The California Small Business Investment Protection Act will mean more litigation.

Fact: There is no evidence for this claim. An analysis of recent franchisee-franchisor litigation in the Ninth Circuit—which includes
California—suggests that there is a lower rate of franchise contract litigation in states with franchisee rights laws.

Fear: The California Small Business Investment Protection Act will impose new bureaucracy and regulations on small business.

Fact: The California Small Business Investment Protection Act does not create any bureaucracy or new regulations for small businesses. It is an amendment to an already existing law that strengthens franchisee protections in discrete areas.

Fear: Franchisors will withdraw from California, and brands will be destroyed.

Fact: California is the 8th largest economy in the world. As noted above, many states smaller than California offer franchisees similar protections to those in the Small Business Investment Protection Act, and franchisors have not withdrawn from those states. No franchisor will tell its investors, bankers or Wall Street that it will stop doing business in the Golden State.

Fear: The California Small Business Investment Protection Act will destroy franchise equity by allowing a group of dishonest people to play by their own set of rules.

Fact: Franchise equity comes from the hard work of the franchisees. The California Small Business Investment Protection Act incorporates the International Franchise Association’s principle that “franchisees should have the opportunity to monetize any equity they may have developed in their business prior to the expiration or termination of the franchise agreement.” The Act protects from unfair termination and termination threats the equity franchisees have built in their businesses.

Fear: The California Small Business Investment Protection Act will undermine franchise agreements that are carefully constructed to ensure success for both parties.

Fact: Franchise agreements have become one-sided contracts of adhesion—meaning that franchisees cannot bargain over contract terms. The one-sided nature of franchise agreements, and the refusal of most franchisors to negotiate any changes, means that franchisees are vulnerable to franchisor abuses, such as unjust terminations. These one-sided contracts make the modest reforms in the California Small Business Investment Protection Act necessary.

Fear: The California Small Business Investment Protection Act will add new regulations that will make it harder for new and existing franchisees to open new outlets.

Fact: The Act regulates franchisors’ abusive practices. It does not in any way limit franchisees’ ability to open new outlets.

Fear: Franchising is already highly regulated at the federal and state level. More regulation is counter productive.

Fact: Franchising is not highly regulated. The federal government, through the Federal Trade Commission, only regulates the information that franchisors provide prospective franchisees before they invest, but it has no rules protecting franchisees from unfair termination or non-renewal or protecting their right to sell their business. Franchisors, however, require franchisees to follow thousands of pages of manuals, policies and procedures to the letter or face the possible loss of their business. The California Small Business Investment Protection Act will add common-sense protections to existing state law. It will prevent franchisors from using their thousands of pages of regulations to arbitrarily take away franchisees’ businesses.

Fear: The California Small Business Investment Protection Act is one sided, giving only the franchisee a right to damages. The franchisor has no remedy.

Fact: The franchisor already has the ability to impose well-defined remedies, such as damages for breach of the franchise agreement. The California Small Business Investment Protection Act will merely level the playing field so that franchisees who follow the rules aren’t thrown out of the game.

Additional Resources

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