Franchise Lawyer Arizona Discusses Franchising Exemptions

When Can You Avoid Registering A Franchise?

Fifteen states have franchise investment laws that require franchisors to provide pre-sale disclosures to potential buyers. Of these fifteen, thirteen treat the sale of a franchise like the sale of a security.

Under the right conditions, taking advantage of size and experience exemptions can save an individual selling a franchise both time and money when it comes time to sell.  Being a larger and more experienced franchisor, or choosing to do business with an ample and sophisticated franchisee, can have major advantages.  In many cases, the size and experience of a franchisee allows buyers to take advantage of certain franchise exemptions from federal and state franchise disclosure or registration laws.  There are several franchise registration states that also allow their administrators to grant “discretionary” exemptions to franchisees on a case-by-case basis.  These exemptions are often granted in light of a specific franchisor’s or franchisee’s size and experience.

There are also instances when a transaction may be available as an exemption under federal law (FTC Rule), but may not be applicable in the specific state where the franchise is located.  Also, a transaction may be exempt from applicable state registration requirements, but may not be exempt from state disclosure requirements.  Exemption-based franchising has many moving parts, such as the inner workings of a clock.  Seeking a franchise law attorney can help assure that you apply for every exemption you may qualify for, saving you time and money in either the set-up stages or selling stages of your franchise.

Two Major Franchise Exemptions

Exemptions For Franchisor’s And Franchisee’s

There are two major exemptions that we can discuss today.  One is based on the net-worth of a franchisee.  The other takes the franchisee’s size and experience into account.

First, let us delve into the exemption based on net-worth.  Certain state franchise laws (not to be confused with federal, or FTC Rule) provide exemptions based on a franchisor’s financial strength.  This particular type of exemption is known as a “high net worth franchisor” exemption.  This exemption is based solely on the components of the franchisor.  The rationale behind this is that franchisors with a high net worth have not been responsible for grievous franchise sales violations, and have the monetary resources to pay fines and damages if they are later charged with a sales violation..  The states of California, Illinois, Indiana, Maryland, New York, North Dakota, Rhode Island, Washington, and Virginia offer this specific type of exemption.  The monetary needs can vary significantly state by state.  For example, California, Illinois, New York and Washington law requires a net worth of at least $5 million, where as Maryland, North Dakota and Rhode Island law requires a net worth of at least $10 million.  Virginia has the most stringent criteria, offering this exemption only to franchisors that have a net worth of at least $15 million.  To determine the net worth of a franchisor applying for this exemption, the state will require audited financial statements.  The state will then make a determination whether or not to grant a franchisor this exemption.  Franchisors must also carefully monitor their financial position, due to the fact that the “net worth exemption” may become unavailable if there happens to be a drop in their net worth.

The other exemption that can be offered by a registration state is an exemption based upon either the franchisor’s or the franchisee’s size, experience, or sophistication. An experienced Franchise Lawyer can help you determine whether you meet the exemption requirements.  Each state includes a minimum experience requirement for what is known as the “large franchisee exemption”.  This exemption requires that the potential franchisee has a minimum number of years of experience, in the type of business being offered as a franchise.  This exemption may also be available to a potential franchisee whose initial investment in the franchised business exceeds $1 million, and who has a net worth of at least $5 million.  Some states permit a franchisee to receive this exemption based solely on its parent’s, or franchisor’s, experience.  This means that if you are either a franchisee or franchisor with ample experience, you can take advantage of this exemption.  While “large franchisee” or “large franchisor” exemptions may offer plentiful benefits, all franchise buyers and sellers need to be aware that certain limitations apply.

Even when a franchisee or its parent franchisor qualifies for one of these exemptions, state law still requires some pre-sale disclosure.  In this case, some state-required pre-sale disclosure may be far less extensive than a disclosure that would be required under FTC Rule, a qualified franchise attorney can help you.

Considering A Franchise Attorney

Utilizing A Franchise Attorney To Get All Your Exemptions

From a practical standpoint, many franchisors considering these size and experience exemptions may have already prepared required franchise disclosure documents (FDDs), and may even already hold relevant state registrations.  Under the right conditions, taking advantage of the above described exemptions can save a franchisor a great deal of money, not to mention valuable time when selling franchises.  Remember, it is always an excellent idea to contact an attorney seasoned in franchise law before the purchase or sale of any franchise.  An attorney can make sure you take full advantage of all aspects of the law that best fit your needs—while avoiding potential pitfalls.