In general, selling and offering a franchise is regulated by state and federal franchise laws. Registering a franchise impacts the sale and offer of a franchise, so it is important to know when registration is required. In Indiana, franchisors are required to register before offering and selling franchises. Having to register before offering and selling a franchise can be frustrating for a franchisor because registration can take a long time and be expensive. As a result, franchisors are often stuck waiting for a registration to finalize, when they can be offering and selling their franchise.
Luckily, Indiana has several exemptions from registration. These exemptions can be based on the different types of transactions or can be based on the characteristics of franchisors and potential franchisees. If one of these exemptions apply, then franchisors can avoid the registration process and sell their franchise a lot sooner.
The seasoned or large franchisor exemption is available to franchisors if they meet certain net worth and experience standards. For example, McDonald’s does not have to register in most states because it meets the net worth and experience standards. In Indiana, the net worth standard is $5 million or $1 million if a corporation owning at least 80% of the franchisor has a net worth of $5 million. Ind. Code Ann. § 23-2-2.5-3(1). The experience standard requires franchisors or corporations owning at least 80% of the franchisor to have 5 years in the business immediately before the sale or have at least 25 franchisees in the same business. Ind. Code Ann. § 23-2-2.5-3(2).
The single sale franchise exemption is available to franchisors who wish to avoid registration requirements by limiting the number of franchises offered for sale. In Indiana, the number of franchise sales is limited to 1 sale in any 24-month period. Ind. Code Ann. § 23-2-2.5-3.
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. In other words, if the franchisee’s sale is for its own account and the franchisee is not an affiliate of the franchisor, then the franchisor is exempt from registration. Ind. Code Ann. § 23-2-2.5-4. Further, the franchisee’s sale must not be “effected by or through” the franchisor. Ind. Code Ann. § 23-2-2.5-4. However, the franchisor can still approve or disapprove of the new franchisee. Ind. Code Ann. § 23-2-2.5-4.
The exemption by order depends on whether the offer or sale is not “being comprehended within the purpose” of the law and whether registration is “necessary or appropriate” in the public interest or for the protection of investors. Ind. Code Ann. § 23-2-2.5-5.
Aside from these exemptions, certain transactions or interests can be excluded from the definition of a franchise or offer. If a transaction or interest is excluded, then registration is not required. In Indiana, fractional franchises, renewals of existing franchise agreements, and out of state sales are excluded.
The fractional franchise exclusion is available to franchisors when a franchise is only a small percentage of the potential franchisee’s business. A “fractional franchise” is meant to allow an existing business to add new, but similar products or services. Potential franchisees must have at least 2 years of experience in the type of business represented by the franchisor. Ind. Code Ann. § 23-2-2.5-1(a). Also, franchisors and potential franchisees must anticipate that sales from the franchise will not be more than 20% of the total sales in the first year of business. Ind. Code Ann. § 23-2-2.5-1(a).
The renewal of an existing franchise agreement exclusion is available to franchisors that already have agreements with potential franchisees. Indiana only requires that there be no interruption in the operation of the franchise business by the potential franchisee. Ind. Code Ann. § 23-2-2.5-1(g).
The out of state franchise exclusion is available to franchisors when a state allows them to sell outside the state to non-residents. First, franchisors in Indiana must ensure that potential franchisees do not reside in Indiana. Ind. Code Ann. § 23-2-2.5-2. Second, the franchised business must be operated outside Indiana. Ind. Code Ann. § 23-2-2.5-2.
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Indiana and can be very different than federal exemptions. Additionally, there are some Indiana exemptions that may impact disclosures, but not registration, and vice versa. Thus, it is important to consider how federal and state exemptions interact with each other when registering, selling, and offering a franchise.