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 Washington, 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, Washington 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 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. The net worth standard in Washington is $5 million or $1 million if the parent company has a net worth of $5 million. Wash. Rev. Code Ann. § 19.100.030(4)(b)(i)(A). The experience standard requires franchisors to have at least 25 franchisees conducting business or 25 franchisees that have conducted business that is the same as the franchise during the 5 years immediately before the sale. Wash. Rev. Code Ann. § 19.100.030(4)(b)(i)(B).
The large franchisee exemption is available to franchisors when potential franchisees have strong bargaining positions. Potential franchisees must have a net worth of $5 million and must be “accredited investors.” Wash. Rev. Code Ann. § 19.100.030(5).
The insider exemption is available to franchisors if potential franchisees are already associated with franchisors. The idea is that “insiders” are knowledgeable about the franchise business, so Washington is less concerned about sophistication or experience issues. “Insiders” are generally partners, executive officers, directors, or managers. Any director, executive officer, or general partner of the franchisor (of the franchises being offered or sold) is exempt. Wash. Admin. Code § 460-80-108(4).
The nominal franchise fee exemption is available to franchisors when annual franchise fees are only nominal. For example, in Washington, the franchise fee cannot be more than $500. Wash. Rev. Code Ann. § 19.100.030(4)(b)(iii).
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 for the current franchisee’s own account and at the time of the offer or sale, the franchisee must have operated a “substantially similar” franchise for at least 2 years. Wash. Rev. Code Ann. § 19.100.030(6). The underlying sale must have been a franchise offering that was registered in Washington. Wash. Rev. Code Ann. § 19.100.030(6).
The single sale franchise exemption is available to franchisors who wish to avoid registration requirements by limiting the number of franchises offered for sale. A franchisor is exempt if no more than 3 franchises are situated in Washington. Wash. Rev. Code Ann. § 19.100.030(4)(b)(ii)(B).
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. There are three requirements in Washington. First, the offer or sale must be made by a franchisee that is not an affiliate of the franchisor. Wash. Rev. Code Ann. § 19.100.030(1). Second, the entire franchise must be sold. Wash. Rev. Code Ann. § 19.100.030(1). Third, the sale cannot be affected by or through the franchisor. Wash. Rev. Code Ann. § 19.100.030(1).
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, conservator, or court-approved transactions are exempt. Wash. Rev. Code Ann. § 19.100.030(2).
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 is exempt. Other institutions include savings institutions, trust companies, insurance companies, investment companies, pension or profit-sharing trusts, or other financial institutions or institutional buyers, or broker-dealers. Wash. Rev. Code Ann. § 19.100.030(3). Also, the exemption applies when the purchasing institution is acting for itself or in a fiduciary capacity. Wash. Rev. Code Ann. § 19.100.030(3). Overall, Washington 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. The offer or sale of the franchise cannot occur in Washington. Wash. Rev. Code Ann. § 19.100.020(3).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Washington and can be very different than federal exemptions. Additionally, there are some Washington 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.