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 Minnesota, 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, Minnesota 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. Minn. Stat. Ann. § 80C.01. Franchisors and potential franchisees anticipate that sales from the franchise will not be more than 20% of the sales of the potential franchisee. Minn. Stat. Ann. § 80C.01.
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 not vary substantially from a franchise already owned by the current franchisee. Minn. R. 2860.1100. Also, a franchisor cannot require that the current franchisee agree to any unfair and inequitable terms as a condition of sale. Minn. R. 2860.1100.
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. In other words, the sale cannot be “effected by or through” the franchisor, but the franchisor may reserve a right to approve or disapprove of the new franchisee. Minn. Stat. Ann. § 80C.03(a). Also, the franchisee cannot make more than 1 sale during any 12-month period. Minn. Stat. Ann. § 80C.03(a). Lastly, the new franchisee cannot be required to enter into a substitute franchise agreement or other agreement containing terms that are unfair and unequitable.
The renewal of an existing franchise agreement exemption is available to franchisors that already have agreements with potential franchisees. Minnesota only requires that the renewed franchise not vary substantially from the existing franchise. Minn. R. 2860.1100.
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 Minnesota, the number of franchise sales is limited to 1 sale in any 12-month period. Minn. Stat. Ann. § 80C.03(e). Keep in mind that there are additional criteria for franchisors wishing to invoke this exemption in Minnesota.
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. Minn. Stat. Ann. § 80C.03(b).
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 banking organization, financial organization, or life insurance company is exempt. Minn. Stat. Ann. § 80C.03(c). Overall, Minnesota 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. Minnesota has 4 major requirements. First, the potential franchisee must not be domiciled in Minnesota. Minn. Stat. Ann. § 80C.03(h). Second, the potential franchisee may not be present in Minnesota in connection with the offer or sale of the franchise. Minn. Stat. Ann. § 80C.03(h). Third, the franchised business may not be operated wholly or partly in Minnesota. Minn. Stat. Ann. § 80C.03(h). Fourth, the franchise transaction must not violate the laws of the jurisdiction where the potential franchisee is a resident. Minn. Stat. Ann. § 80C.03(h).
The exemption by order depends on whether the Commissioner exempts a transaction as not being within the purposes of the Minnesota Franchise Act such that registration is neither necessary nor appropriate as a matter of public interest or to protect investors. Minn. Stat. Ann. § 80C.03(g).
The securities exemption is available to franchisors when a state exempts from registration offers or sales of a franchise which constitute securities. In Minnesota, this exemption is provided if the offer or sale is not used for the purpose of evading the Minnesota Franchise Act and the securities are currently registered according to Minnesota law. Minn. Stat. Ann. § 80C.03(d).
Aside from these exemptions, certain transactions are excluded from the definition of a franchise. If a transaction is excluded, then registration is not required. In Minnesota, nominal franchise fees and leased departments are excluded.
The nominal franchise fee exclusion is available to franchisors when annual franchise fees are only nominal. For example, in Minnesota, the franchise fee cannot be more than $100 per year. Minn. Stat. Ann. § 80C.01.
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. Minn. Stat. Ann. § 80C.01.
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Minnesota and can be very different than federal exemptions. Additionally, there are some Minnesota 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.