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. Franchisors in Wisconsin 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, Wisconsin 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 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 Wisconsin, the initial investment must be a $100,000 cash payment. Wis. Stat. Ann. § 553.235(1)(a). Also, the franchisor must reasonably believe that the potential franchisee has the knowledge and experience necessary to evaluate the merits and risks of the investment. Wis. Stat. Ann. § 553.235(1)(b).
The nominal franchise fee exemption is available to franchisors when annual franchise fees are only nominal. For example, in Wisconsin, the annual payment in excess of the wholesale prices for products and services cannot be more than $1,000. Wis. Admin. Code DFI-Sec § 32.05(1)(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 the same as a franchise that the potential franchisee is operating at the time of the offer or sale. Wis. Admin. Code DFI-Sec § 32.05(1)(e).
Sale by Existing Franchisee Exemption
The sale by existing franchisee exemption is available to franchisors when the franchisor is not involved in the sale. The sale must be for the franchisee’s own account and the sale cannot be effected by or through the franchisor. Wis. Stat. Ann. § 553.23.
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 trust companies, credit unions, or savings and loan associations where the purchase is for the institution’s own account. Wis. Admin. Code DFI-Sec § 32.05(1)(c)(2). Overall, Wisconsin 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. There are three requirements in Wisconsin. First, the potential franchisee cannot be domiciled in Wisconsin. Wis. Admin. Code DFI-Sec § 32.05(1)(d). Second, the franchised business may not operate in Wisconsin. Wis. Admin. Code DFI-Sec § 32.05(1)(d). Third, the offer, sale, and purchase of the franchise business must be in compliance with the laws of the state where the franchised business will operate, or the potential franchisee is domiciled. Wis. Admin. Code DFI-Sec § 32.05(1)(d).
An exemption by order depends on a couple of things. The Division may exempt an offering if registration is not necessary or appropriate in the public interest or for the protection of investors. Wis. Stat. Ann. § 553.25.
Aside from these exemptions, certain transactions are definitionally excluded. If a transaction is excluded, then registration is not required. In Wisconsin, fractional franchises, renewals of existing agreements, and co-ops are excluded.
The fractional franchise exclusion 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 same type of business. Wis. Stat. Ann. § 553.22(1). Franchisors and potential franchisees must anticipate that sales from the franchise will not be more than 20% of the total sales of the potential franchisee in the first year. Wis. Stat. Ann. § 553.22(1).
The renewal of an existing franchise agreement exclusion is available to franchisors that already have agreements with potential franchisees. Wisconsin only requires that there be no interruption in the operation of the business and no material change in the franchise relationship. Wis. Admin. Code DFI-Sec § 32.05(1)(g).
The co-op exclusion is available to franchisors when non-profit organizations are operated on a cooperative basis by and for its members. In Wisconsin, an exclusion is provided for agricultural co-ops authorized by The Capper-Volstead Act and retail co-ops that operate by and for independent retailers that sell goods at wholesale or furnish services primarily to its members. Wis. Stat. Ann. § 553.22(3).
Again, if an exemption applies, franchisors can skip the registration process. Keep in mind that these exemptions are specific to Wisconsin and can be very different than federal exemptions. Additionally, there are some Wisconsin 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.