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 Maryland, 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, Maryland 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 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 Maryland, the net worth standard is $10 million or $1 million if a corporation owning at least 80% of the franchisor has a net worth of $10 million. Md. Code Regs. 02.02.08.10(D). The experience standard requires franchisors to have at least 25 franchisees in the same business during the 5 years immediately before the sale. Md. Code Regs. 02.02.08.10(D).
The large investment exemption is available to franchisors when the franchisor and potential franchisee have relatively equal bargaining power and business expertise. If the potential franchisee can afford a large investment, then it is more likely that the potential franchisee is experienced in business and has the resources to protect itself. In Maryland, the initial investment amount must be more than $750,000. Md. Code Regs. 02.02.08.10(E).
The nominal franchise fee exemption is available to franchisors when annual franchise fees are only nominal. For example, in Maryland, the franchise fee cannot be more than $100. Md. Code Regs. 02.02.08.10(C).
The sale to existing franchisee exemption is available to franchisors when an additional franchise is sold to a current franchisee. The sale of an additional franchise must be substantially similar to a franchise already owned by the current franchisee. Md. Code Ann., Bus. Reg. § 14-214(b)(2).
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, then the franchisor is exempt from registration. Md. Code Ann., Bus. Reg. § 14-214(c). Also, the sale is not “effected by or through” the franchisor just because the franchisor has a right to approve or disapprove of the new franchisee. Md. Code Ann., Bus. Reg. § 14-214(c).
The renewal of an existing franchise agreement exemption is available to franchisors that already have agreements with potential franchisees. Maryland only requires that there be no interruption in the operation of the franchise business by the potential franchisee. Md. Code Ann., Bus. Reg. § 14-203(c).
The sales by executors, trustees, etc. exemption is available to franchisors when a transaction is made by judicial officers. For example, transactions by an executor, administrator, sheriff, receiver, trustee in bankruptcy, guardian, or conservator are exempt. Md. Code Ann., Bus. Reg. § 14-214(b)(1).
The institutional franchisee exemption is available to franchisors when a sale or offer is made to an institution. For example, an offer or sale of a franchise to a bank, savings bank, savings and loan association, trust company, insurance company, investment company, investment company or other financial institution or to a broker-dealer is exempt. Md. Code Regs. 02.02.08.10(F)(1).
The exemption applies when the potential franchisee is acting for itself or as a fiduciary. Md. Code Regs. 02.02.08.10(F)(1)(a). Also, the franchise cannot be purchased for the purpose of resale. Md. Code Regs. 02.02.08.10(F)(1)(b). Overall, Maryland is less concerned about protecting these types of purchasers.
The out of state franchise exemption is available to franchisors when a state allows them to sell outside the state to non-residents. First, to the franchisor’s knowledge, the potential franchisee must not be a resident of Maryland. Md. Code Regs. 02.02.08.10(B)(1). Second, the franchised business must not be operated in Maryland. Md. Code Regs. 02.02.08.10(B)(2)(a). Third, the sale of the franchise must neither violate the laws of the jurisdiction where the potential franchisee is a resident nor the anti-fraud provisions of Maryland’s franchise laws. Md. Code Regs. 02.02.08.10(B)(2)(b)-(c).
The exemption by order depends on whether the Commissioner determines that the sale is not within the purpose of Maryland’s franchise laws and registration is not necessary or appropriate in the public interest or for the protection of potential franchisees. Md. Code Regs. 02.02.08.10(G).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Maryland and can be very different than federal exemptions. Additionally, there are some Maryland 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.