Last month we looked at four exemptions franchisors use to avoid the registration and presale disclosure requirements of California's Franchise Investment Law. Several lesser known exemptions that can be used by franchisors are:
A. Fractional Franchise Exemption: An offer is exempt from registration and disclosure if: 1) the purchase involves adding a new product line to the purchaser's existing business; AND, 2) the purchaser (or one of its officers, directors or managing agents who has held his/her position for the 24 month immediately preceding the purchase) has for the 24 months immediately preceding the purchase operated a business offering "substantially similar" products and services; AND, 3) the franchise will be operated from the same location as the purchaser's current business; AND, 4) the parties anticipate in good faith that sales of the franchised business will not exceed 20% of the purchaser's total sales on an annual basis; AND, 5) the purchaser is not controlled by the franchisor; AND, 6) the franchisor files the specified notice with the DOC and pays a fee prior to the sale. While this is a very useful exemption and rather frequently relied upon, it requires considerable advance analysis, which may include financial analysis relating to potential sales percentages by the purchaser's accountants.
B. Seasoned Franchisor Exemption: An offer is exempt from registration, BUT NOT DISCLOSURE, if: 1) the franchisor's net worth is at least $5 million, OR the franchisor's net worth is $1 million and the franchisor's parent's net worth is $5 million, and the parent guarantees franchisor's obligations under the franchise agreement; AND, 2) the franchisor or franchisor's parent has either, or in combination, for 5 years immediately preceding the offer or sale conducted the franchised business OR had 25 franchisees conducting the same franchised business; AND, 3) the franchisor discloses the franchisee in writing with a California compliant FDD at least 10 days before the franchisee executes any franchise document and before the franchisee pays any monies to franchisor relating to the sale; AND, 4) the franchisor files the specified notice with the DOC and pays a fee prior to the sale. In all cases, audited financial statements are required to establish net worth.
C. Sales by Franchisees: Sales by franchisees of their franchises for their own account (transfers or assignments) are exempt from registration and disclosure for the selling franchisee and the franchisor. Requirements in the franchise agreement that the franchisee obtain the franchisor's consent prior to the transfer do not negate eligibility for this exemption.