Franchising A Business in California

Asked almost 3 years ago - San Jose, CA

I read somewhere there is an exemption to going through the franchise registration process in California if you're selling a franchise to an insider who works for your company and is familiar with everything. Is this true and are there any further details?

Attorney answers (4)

  1. Kevin Brendan Murphy

    Pro

    Contributor Level 15

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    Answered . As a franchise attorney, I can say the exemption you are referring to is the "Experienced Franchisee" exemption under Section 31106 of the California Franchise Investment Law.

    The exemption can apply if any of the following three conditions exist:

    (1) One or more of the owners of the prospective franchisee owning at least a 50 percent interest in the prospective franchisee meet both of the following:

    (a) The owner or owners have had, within the seven years before the date of the sale or other transaction, at least 24 months' experience being responsible for the financial and operational aspects of a business offering products or services substantially similar to those offered by the franchised business.

    (b) The owner or owners are not controlled by the franchisor,

    (2) One or more of the owners of the prospective franchisee owning at least a 50 percent interest in the prospective franchisee meet both of the following:

    (a) The owner or owners are, or have been within 60 days prior to the sale or other transaction, an officer, director, managing agent, or an owner of at least a 25 percent interest in the franchisor for at least 24 months.

    (b) The owner or owners are not controlled by the franchisor.

    (3) The offer, sale, or other transfer is of an additional franchise to an existing franchisee of the franchisor, or to an entity, one or more of the officers, directors, managing agents or owners of at least a 25 percent interest of which is an existing franchisee of the franchisor; provided that, in either case, for 24 months or more the franchisee, or the qualifying person, has been engaged in a business offering products or services substantially similar to those to be offered by the franchise being sold, or otherwise transferred.

    So, under all possibilities (1) and (3), the person must have at least 24 months of experience - either as a franchisee of the franchisor, or responsibility for financial and operational aspects in a business offering substantially similar products or services . Ownership interest is another test under both.

    Under possibility (2), it's also a 24 month period test, but as an officer, director or managing agent of the franchisor, or an owner of at least 25% of the franchisor.

    As you can see, this is a complicated exemption that requires careful legal analysis before doing anything.

    If one of the three prongs applies, the franchisor is still required to file a a notice of exemption and pay the fee prescribed in subdivision (f) of Section 31500 no later than 15 calendar days after the sale of a franchise

    Consult with a good franchise attorney in your area for specific advice.

    Kevin B. Murphy, B.S., M.B.A., J.D.
    Attorney at Law
    Director of Operations - Mr. Franchise
    FRANCHISE FOUNDATIONS APC

  2. Min Kyung Chai

    Contributor Level 7

    4

    Lawyers agree

    Answered . The exemptions from registration are available under California Corporations Code Sections 31100-31109. Most of these exemptions are based on the parties' net worth, experience, and relationship with the franchisor. The exemption you are referring to is offered under Section 31106, however, each element requires a certain number of years of experience and/or affiliation with the franchisor to be met before you can take the exemption. So it is recommended that you review each element and discuss the facts with an attorney to determine whether you can qualify under the 31106 exemption.

    If you can qualify, you would need to file the proper forms and pay the fees to the CA Dpt. of Corporations to complete the qualification process.

    The above answer is being provided for informational purposes only and not for the purpose of providing legal... more
  3. Kevin Samuel Sullivan

    Pro

    Contributor Level 20

    2

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    Answered . Talk to a local franchise lawyer who can review your situation for you.

  4. Curtis Lamar Harrington Jr

    Contributor Level 20

    2

    Lawyers agree

    Answered . For your further reference, I include the complete list of certified franchise attorneys in California. In fact the chair of the Board of Legal Specialization in California for 2009-2010 was Stafford Matthews who is on the list in your area (in addition to the attorney who provided a most excellent answer). Just wanted to give you additional resources.

    Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal... more

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