AB 2632 adds Section 20045 to the Business and Professions Code and prevents a franchisor from using any fee collected from a franchisee for one stated purpose for any other purpose. The bill mandates that those fees be kept separate from the franchisor’s other funds, requires an annual detailed accounting, and gives franchisees a right to audit that accounting once per fiscal year.
The measure forces greater transparency around common industry charges—such as advertising and technology fees—and constrains how much of those pools may be absorbed by franchisor overhead unless the franchisor discloses the precise administrative allocation. Compliance will affect franchisor cash management, accounting practices, and franchise disclosure processes while giving franchisees a clearer line of sight into how pooled fees are spent.
At a Glance
What It Does
The bill bars the diversion of fees collected for a stated purpose, requires those funds to be segregated from the franchisor’s general accounts, and obligates franchisors to produce an annual, itemized accounting. It also limits administrative deductions from those fee pools unless the franchisor specifies the exact amount or percentage taken for overhead.
Who It Affects
All franchisors operating in California and franchisees domiciled or operating in the state; franchise counsel, accountants, and third-party managers who handle marketing, loyalty, or technology pools will need to adjust processes. Trade associations and franchise disclosure preparers will also face changes to standard practices.
Why It Matters
This is a structural change to how franchisors treat pooled fees: it reduces unilateral franchisor discretion over common charges, creates a statutory audit right, and may impose new liquidity and bookkeeping constraints on franchisors that historically treated some pooled funds as fungible.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
AB 2632 creates a simple rule: if a franchisor collects a fee from a franchisee for a stated purpose, the franchisor must use that money only for that purpose and must keep it segregated from its other funds at all times. The statute explicitly treats advertising funds, loyalty collections, and technology fees as examples of “fees for a stated purpose,” but its language is broad enough to cover other labeled pools or earmarked charges.
The bill requires more specific disclosure when part of a stated-purpose fee is intended to cover administrative expenses or overhead. If the franchisor will take a portion of the fee for administration, it must disclose the exact amount or percentage.
If the franchisor provides no exact figure, the law caps administrative deductions at 10 percent of the fee collected. That creates two compliance paths: disclose the administrative take and avoid the cap, or refrain from disclosure and remain subject to the 10 percent limit.Franchisees gain an annual, itemized accounting showing amounts collected and how they were applied.
In addition, they receive a statutory right to audit the franchisor’s records regarding these fees once each fiscal year. The bill does not spell out a separate enforcement mechanism or civil penalties in Section 20045 itself; implementation will rely on existing remedies and any dispute-resolution provisions already in franchise agreements and California franchise law.Operationally, the statute will push franchisors to adjust banking and accounting practices so that eligible fee receipts flow into identifiable, segregated accounts or subaccounts.
It also raises practical questions about classification (what counts as administrative overhead versus program spend), the timing and format of the annual accounting, and the logistical and cost implications of responding to annual audits by franchisees.
The Five Things You Need to Know
The bill adds Section 20045 to the Business and Professions Code, creating a statutory rule for "fees for a stated purpose.", Franchisors must segregate stated-purpose fees from their other funds "at all times," preventing co-mingling on an ongoing basis.
If the franchisor does not disclose a precise administrative allocation, administrative or overhead charges from a stated-purpose fee are limited to 10% of the fee.
Franchisees are entitled to one audit of the franchisor’s collection and use of these fees per fiscal year, alongside an annual detailed accounting.
The statutory definition of a "fee for a stated purpose" explicitly lists advertising funds, loyalty collections, and technology fees as illustrative examples.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Use and segregation requirement for stated-purpose fees
Subsection (a) imposes a categorical prohibition: fees collected for a stated purpose must be used only for that purpose and must remain segregated from the franchisor’s other funds at all times. Practically, this forces franchisors to establish separate bank accounts or clearly tracked subaccounts and reconciliations for each eligible fee pool. It elevates bookkeeping from best practice to statutory obligation and creates a clear basis for franchisees to challenge diversion.
Administrative allocation: disclosure or 10% cap
Subsection (b) addresses how much of a stated-purpose fee may be consumed by administrative expenses or overhead. The franchisor can avoid the statutory 10 percent limit only by disclosing the exact amount or percentage it intends to allocate to administration. The subsection therefore creates a binary compliance choice that affects disclosure obligations: either reveal the administrative take (and potentially exceed 10%) or keep it under 10% but provide no precise administrative line item.
Annual accounting and limited audit right for franchisees
Subsection (c) requires franchisors to give franchisees an annual, detailed accounting of amounts collected and how they were used for any stated-purpose fees, and grants franchisees the right to audit the franchisor’s records on those fees no more than once per fiscal year. The provision sets a recurring transparency cadence but limits audit frequency, balancing franchisee oversight against repeated auditing burdens on franchisors.
Illustrative list of covered fees
Subsection (d) defines a "fee for a stated purpose" and lists advertising funds, loyalty collections, and technology fees as nonexclusive examples. By naming common industry pools, the bill signals regulatory intent to cover the largest and most controversial pooled fees, while leaving open application to other earmarked charges depending on facts and labeling.
This bill is one of many.
Codify tracks hundreds of bills on Economy across all five countries.
Explore Economy in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Independent franchisees and small multi-unit operators — gain clearer visibility into how pooled fees are spent, and a statutory audit right to verify that funds labeled for marketing, loyalty programs, or technology are actually used for those programs.
- Franchisee advocacy groups — obtain a statutory tool to push for greater accountability and enforcement when franchisors divert labeled funds, strengthening collective bargaining and dispute leverage.
- Accountants and compliance consultants — will see new demand for segregated-account setups, reconciliations, and audited disclosures as franchisors update their financial controls to comply with the statute.
Who Bears the Cost
- Franchisors — face increased bookkeeping, banking, and internal-control costs to maintain segregated accounts, produce annual itemized accountings, and respond to audits; larger franchisors that previously relied on fungible cash will need system changes.
- Smaller franchisors and start-ups — may be disproportionately affected by fixed compliance costs and the liquidity constraints that segregation can impose, especially when pooled funds previously covered variable program expenses.
- Third-party fund managers and marketing agencies — could be subject to new contractual scrutiny and operational change as franchisors change how they collect, hold, and disburse pooled funds.
Key Issues
The Core Tension
The bill pits franchisee protections—clarity, segregation, and auditability of purpose-specific funds—against franchisor operational flexibility and cost efficiency: it increases oversight and transparency but can constrain cash management and impose recurring compliance costs, with no single clear way to balance those competing interests.
The bill creates clearer statutory obligations but leaves several implementation details unresolved. It does not specify exactly what form the "annual detailed accounting" must take, how quickly franchisors must produce records after an audit demand, or who bears the cost of audits.
Those operational gaps will be filled either by regulations, contractual language in franchise agreements, or litigation that tests the statute's contours.
Another open question arises from the interaction between the disclosure option and the 10 percent cap: franchisors may choose to disclose a high administrative percentage, which increases transparency but could also normalize larger overhead extractions. Conversely, the 10 percent fallback may push some franchisors to reclassify expenses or adjust program design to avoid disclosure, producing substitution effects the statute does not address.
Finally, requiring segregation "at all times" can create real cash-flow pressure for franchisors that historically managed pooled funds dynamically, prompting either short-term borrowing or restructured contracts to preserve operational flexibility.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.