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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 New York, 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, New York has several exemptions from franchise 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 who 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.
There are two types of exemptions in New York. The net worth standard for the discretionary exemption is $5 million or $1 million if the parent company has a net worth of $5 million. N.Y. Gen. Bus. Law § 684(2). The net worth standard for the mandatory exemption is $15 million or $3 million if the parent company has a net worth of $15 million. N.Y. Gen. Bus. Law § 684(3)(a). However, no experience is required for franchisors in New York.
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 24 months of experience in a “substantially similar” business as the franchise. N.Y. Comp. Codes R. & Regs. tit. 13, § 200.10(b). The new franchise must be operated from the same location as the potential franchisee’s existing business. N.Y. Comp. Codes R. & Regs. tit. 13, § 200.10(b).
Franchisors and potential franchisees anticipate that sales from the franchise will not exceed 20% of the total sales of the potential franchisee. N.Y. Comp. Codes R. & Regs. tit. 13, § 200.10(b). Lastly, franchisors must not “control” potential franchisees. N.Y. Comp. Codes R. & Regs. tit. 13, § 200.10(b).
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. N.Y. Gen. Bus. Law § 684(3)(d). Also, the current franchisee must purchase the franchise to operate the business and not for the purpose of resale. N.Y. Gen. Bus. Law § 684(3)(d).
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 a current franchisee’s own account and cannot be affected by or through a franchisor. N.Y. Gen. Bus. Law § 684(5).
Additionally, the sale must be isolated and not part of a distribution plan of franchises. Finally, the current franchisee must provide the potential franchisee with the franchisor’s disclosure document at least 1 week before execution of the contract. N.Y. Gen. Bus. Law § 684(5).
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 New York, a franchisor cannot offer to sell to more than 2 persons, and potential franchisees are not granted a right to resell. N.Y. Gen. Bus. Law § 684(3)(c).
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. N.Y. Gen. Bus. Law § 684(3)(b). Overall, New York is less concerned about protecting these types of purchasers.
The exemption by order depends on a couple of things. New York may grant a discretionary exemption if it finds that it is not inconsistent with the public interest or the protection of potential franchisees. N.Y. Gen. Bus. Law § 684(1).
Aside from these exemptions, certain transactions are definitionally excluded. If a transaction is excluded, then registration is not required. In New York, renewals of existing agreements and petroleum sales are excluded.
The renewal of an existing franchise agreement exclusion is available to franchisors that already have agreements with potential franchisees. New York only requires that there be no interruption in the operation of the business. However, the New York exclusion might apply to renewals when the potential franchisee is required to sign the current form of the franchisor’s franchise agreement, even if the terms of that agreement are materially different. N.Y. Gen. Bus. Law § 681(11).
In New York, there is no mention of the Petroleum Marketing Practices Act; however, the New York Franchise Sales Act does not apply to any agreement or contract for the sale of motor fuel. N.Y. Gen. Bus. Law § 681(3)(b).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to New York and can be very different than federal exemptions. Additionally, there are some New York 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.
