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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 Michigan, 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, Michigan 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 fractional franchise exemption 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 franchise. Mich. Comp. Laws Ann. § 445.1506(1)(h). Franchisors and potential franchisees anticipate that sales from the franchise will not be more than 20% of the sales of the potential franchisee. Mich. Comp. Laws Ann. § 445.1506(1)(h).
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 to a current franchisee who has actively operated the franchise for the past 18 months. Mich. Comp. Laws Ann. § 445.1506(1)(g)(i). Also, the current franchisee must purchase the franchise for investment and not for the purpose of resale. Mich. Comp. Laws Ann. § 445.1506(1)(g)(ii).
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. In other words, the sale must be for the current franchisee’s own account. Mich. Comp. Laws Ann. § 445.1506(1)(f). Additionally, the sale must be isolated, and not part of a distribution plan of franchises. Mich. Comp. Laws Ann. § 445.1506(1)(f)(i). Finally, the current franchisee must provide the potential franchisee with access to the books and records of the franchise being sold. Mich. Comp. Laws Ann. § 445.1506(1)(f)(ii).
The renewal of an existing franchise agreement exemption is available to franchisors that already have agreements with potential franchisees. Michigan only requires that there be no interruption in the operation of the business and no material change in the franchise relationship. Mich. Comp. Laws Ann. § 445.1506(1)(e).
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, marshal, receiver, trustee in bankruptcy, guardian, or conservator are exempt. Mich. Comp. Laws Ann. § 445.1506(1)(a).
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 institution, trust company, insurance company, investment company, other financial institution, association, or institutional buyer, or broker-dealer (where the purchaser is acting for itself or in a fiduciary capacity) is exempt. Mich. Comp. Laws Ann. § 445.1506(1)(b). Overall, Michigan 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, the potential franchisee cannot be domiciled in Michigan. Mich. Comp. Laws Ann. § 445.1506(1)(d). Second, the franchised business must not be operated in Michigan. Mich. Comp. Laws Ann. § 445.1506(1)(d).
The nominal franchise fee exemption is available to franchisors when annual franchise fees are only nominal. For example, in Michigan, the franchise fee cannot be more than $500. Mich. Comp. Laws Ann. § 445.1506(1)(c).
Aside from these exemptions, certain transactions are definitionally excluded. If a transaction is excluded, then registration is not required. In Michigan, leased departments and co-ops are excluded.
The leased departments exclusion is available to franchisors when a business is operated on the franchisor’s premises and is incidental to the franchisor’s business. Mich. Comp. Laws Ann. § 445.1503(1)(d).
The co-op exclusion is available to franchisors when non-profit organizations are operated on a cooperative basis by and for independent retailers. Mich. Comp. Laws Ann. § 445.1504a. There are 9 requirements that the organization must comply with to qualify for the exclusion. Mich. Comp. Laws Ann. § 445.1504a(a)–(i).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Michigan and can be very different than federal exemptions. Additionally, there are some Michigan 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.
