Franchise disclosure obligations and registration can carry significant costs of compliance and can be an administrative burden. Initially drafting a compliant Franchise Disclosure Document (“FDD”) is a time-intensive process. Then the franchisor must update the FDD annually for as long as it wishes to sell franchises. State registration of the franchisor and review of the FDD can further delay franchise sales. Additionally, an FDD contains confidential information that the franchisor may not wish to make public, especially if the business is a particularly sensitive to competition. Franchise laws restrict otherwise legal sales practices, such as making financial performance representations outside of Item 19, which can be another frustration for franchisors.

Exemptions to the franchise disclosure and registration laws provide both seasoned and start up franchisors the opportunity to reduce these burdens and costs by either (1) avoiding registration in a state or (2) avoiding drafting an FDD at all.

In this blog post series, we summarize the exemptions available under the Federal Trade Commission Franchise Rule (“Rule”), which allow a franchisor to sell a franchise without an FDD. Any analysis of what exemptions apply to your brand is incomplete if you do not also consider the application of state law. States may not recognize the federal exemptions and may offer different exemptions to their registration requirements.

The Rule contains eight exemptions, and the focus of this post is the Large Franchisee Exemption. The FTC created this exemption for sophisticated prospective franchisees who do not benefit from the disclosures in an FDD to the degree that unsophisticated franchisees do.

These sophisticated franchisees have business experience and significant net worth, which increases the likelihood that they will not be dependent on the success of the  new franchise and will be able to negotiate protections to their interests. Franchisees who commonly qualify for this exemption are hospitals, universities, or airports.

Large Franchisee Exemption

To qualify for the exemption, the prospective franchisee must (1) have been in business for at least five years and (2) have a net worth of at least $6,165,500.

1.     Business Experience

Unlike other Rule exemptions, the qualifying business experience of the large franchisee does not need to be in franchising or related to the industry of the franchisor. The prospective franchisee simply must have been in business for at least five years. Additionally, the business experience of the prospective franchisee’s parent, subsidiaries, and affiliates can also be considered. This is helpful because sophisticated businesses often create a subsidiary or affiliate to handle a specific transaction. For example, the new subsidiary of a hospital corporation that was created to own a restaurant franchise would have sufficient business experience to qualify for the exemption.

2.     Net Worth

The qualifying large franchisee must have a net worth of at least $6,165,500. This amount is adjusted for inflation by the FTC every four years. The franchisor can determine net worth by examining the entity’s balance sheet or other financial information. The net worth of the prospective franchisee’s parent and affiliates can also be considered by aggregating commonly owned franchisee assets.

If the ideal franchisee for your system is a sophisticated business like an airport, hospital, or university, please reach out to Manning Fulton attorneys to understand the applicability of the Large Franchisee Exemption to your brand.

Photo of Ritchie Taylor, CFE Ritchie Taylor, CFE

Ritchie founded and leads the firm’s franchise practice where for 20 years he has served as the primary franchise counsel to hundreds of franchisors, franchisees, and dealer networks in their franchise and business matters. He has decades of experience helping domestic and international…

Ritchie founded and leads the firm’s franchise practice where for 20 years he has served as the primary franchise counsel to hundreds of franchisors, franchisees, and dealer networks in their franchise and business matters. He has decades of experience helping domestic and international franchisors design and grow their franchise systems with innovative, but compliant, franchise disclosure documents, franchise agreements, area development agreements, and master franchise agreements.  Ritchie’s clients benefit from his wealth of experience representing both sector leading franchisors as well as innovating emerging concepts.  He has substantial experience representing franchise systems operating in the hospitality, restaurant, retail, and home services industries.

As the leader of the largest franchise law practice in the Carolinas, Ritchie represents franchisor clients as their strategic advisor through all phases of growing and protecting their brand including franchise compliance, advertising fund administration, and state enforcement actions.

Ritchie guides franchise clients through mission-critical transactions including equity and debt transactions as well as mergers and acquisitions. He has served as the member of deal teams conducting merger, acquisition, and joint venture transactions in almost all 50 states and internationally, with aggregate transaction value exceeding $3 billion.  Private equity funds retain him to both advise them on franchise due diligence during a transaction and to represent their franchisor portfolio companies post-transaction.

Ritchie is a recognized thought leader in franchising across the Carolinas and nationally. He supports franchising through his active involvement in the International Franchise Association (“IFA”) as a long-time member of the IFA Membership and Legal/Legislative Committees. Ritchie also serves on the IFA Supplier Forum’s Board of Directors and as a member of the IFA’s Emerging Franchisor Task Force. Additionally, he is the first North Carolina attorney to receive the Certified Franchise Executive (“CFE”) designation awarded by the Institute of Certified Franchise Executives (“ICFE”). For the last 6 years, Ritchie served on the ICFE’s Board of Governors, which develops the CFE curriculum as the premier training program for franchise executives.

He is a member of the North Carolina Bar Association Business Law Section Council and is the founding chair of the North Carolina Bar Association Committee on Franchising. For the last decade, Ritchie has been the course planner and taught continuing education programs on franchise law for other North Carolina attorneys.  Ritchie’s peers chose him as the first North Carolina attorney ever listed in both Super Lawyers and The Best Lawyers in America for his work in franchise law.

Photo of Carlie Smith Carlie Smith

Carlie works with franchisors and franchisees to grow their brands and businesses by helping them to comply with state and federal franchise regulations and navigate corporate transactions.  Carlie often assists hospitality and restaurant brands in navigating the regulatory permitting process.

Prior to joining…

Carlie works with franchisors and franchisees to grow their brands and businesses by helping them to comply with state and federal franchise regulations and navigate corporate transactions.  Carlie often assists hospitality and restaurant brands in navigating the regulatory permitting process.

Prior to joining Manning Fulton, Carlie worked as a law clerk at Kirton McConkie, a Salt Lake City law firm. During law school she interned with Judge Thomas B. Griffith of the United States Court of Appeals for the District of Columbia Circuit and Justice Thomas R. Lee of the Utah Supreme Court.