Buying a Franchise in Minnesota: What to Check First

How Do You Check Whether a Franchise Is Registered in Minnesota?

You check registration through the Minnesota Department of Commerce, which keeps the public record. Minn. Stat. § 80C.02 provides: “No person may offer or sell any franchise in this state unless there is an effective registration statement on file in accordance with the provisions of sections 80C.01 to 80C.22 or unless the franchise or transaction is exempted under section 80C.03.” In plain terms, a franchisor needs a current Minnesota registration or a specific exemption before it pitches or sells you a franchise here.

The Department’s franchise registration page describes two tools. ComOnline lets you look up a franchisor and the status of its Minnesota registration. The Commerce Actions and Regulatory Documents Search (CARDS) holds recent franchise registration filings, and the Department states that these documents are public and may be copied. I suggest comparing the filed disclosure document with the one the franchisor gave you, because any difference between them is worth a written question before you sign.

Three limits shape what the check tells you:

1. Exemptions. Minn. Stat. § 80C.03 lists sales that need no registration, “provided that the method of offer or sale is not used for the purpose of evading sections 80C.01 to 80C.22.” I suggest asking a seller that relies on one to name it, because in a proceeding under the Act the seller must prove it. Minn. Stat. § 80C.12, subd. 4 provides: “In any proceeding under sections 80C.01 to 80C.22, the burden of proving an exemption or exception from a definition is upon the person claiming it.”
2. Registration is not approval. Minn. Stat. § 80C.13, subd. 3 bars anyone from telling you that registration means the commissioner found the filed documents “true, complete, and not misleading” or “passed in any way upon the merits of any franchise.” Minn. Stat. § 80C.06, subd. 1 requires the disclosure document to recite “that registration of this franchise does not constitute approval or recommendation of the franchise by the commissioner.”
3. False claims of registration. Minn. Stat. § 80C.13, subd. 3 also provides that “no person may represent that a franchise is registered or exempted from registration when in fact, such is not the case.”

The Minnesota Supreme Court applied the registration rule to an out-of-state company that had no Minnesota registration in Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868 (Minn. 1978). The Act reached the sale through an offer to sell made in Minnesota or, alternatively, an offer to purchase made and accepted here, and the court stated: “Upon the record before us, we find that both of these alternative preconditions to the act’s jurisdiction are satisfied.” Among its other contacts, the company discussed the deal by phone with a Minnesota resident and then mailed a sample agreement into the state. On the first ground, the court found: “Considering all of these acts by CCC, and particularly the mailing of a sample contract to Faye in this state, we find that CCC did make an offer to sell within the state which justified the application of c. 80C.” On the second, it found that “there is also evidence sufficient to justify a finding that an offer to purchase was made and accepted in this state.”

The current reach rule, Minn. Stat. § 80C.19, subd. 2, treats an offer as made in Minnesota “whether or not either party is then present in this state, when the offer originates from this state or is directed by the offeror to this state and received by the offeree in this state.” For the full registration process from the franchisor’s side, see my page on Minnesota franchise registration.

When Must the Franchisor Give You the Disclosure Document?

Two timing rules can apply at once, and each must be met on its own terms. For a franchise subject to Minnesota registration, Minn. Stat. § 80C.06, subd. 5 requires the seller to deliver the current disclosure document, which the statute calls the “public offering statement,” “together with a copy of all proposed agreements relating to the sale of the franchise.” Delivery must come “at least seven days prior to the execution by the prospective franchisee of any franchise or other agreement, or at least seven days prior to the payment of any consideration by the franchisee, whichever occurs first.”

The federal FTC Franchise Rule sets a longer lead time. 16 C.F.R. § 436.2(a) makes it a violation to fail to furnish the current disclosure document “at least 14 calendar-days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” Under 16 C.F.R. § 436.10(b), the FTC “does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436.” The same paragraph states that a state law “is not inconsistent with part 436 if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.”

Three details matter in practice:

1. Changed terms. Under 16 C.F.R. § 436.2(b), if the franchisor alters the attached agreements unilaterally and materially, you must get each revised agreement “at least seven calendar-days before the prospective franchisee signs the revised agreement.” Changes “that arise out of negotiations initiated by the prospective franchisee do not trigger this seven calendar-day period.”
2. The receipt. Minn. Stat. § 80C.06, subd. 5 requires the seller to “obtain a receipt, signed by the prospective franchisee, acknowledging receipt of a copy of the public offering statement prior to executing any franchise or other agreement and prior to paying any consideration.” I suggest dating the receipt with the day you actually received the document, because the receipt is the seller’s proof of timely delivery.
3. The federal large-investment exemption. 16 C.F.R. § 436.8(a)(5)(i) exempts a sale from the federal Rule where “The franchisee’s initial investment, excluding any financing received from the franchisor or an affiliate and excluding the cost of unimproved land, totals at least $1,469,600 and the prospective franchisee signs an acknowledgment verifying the grounds for the exemption.” A footnote adds that for a group of investors, it “applies only if at least one individual prospective franchisee in an investor-group qualifies for the exemption by investing at the threshold level stated in this section.” That exemption is federal only. A franchise subject to Minnesota registration still carries the seven-day Minnesota duty.

What Should You Read First in the Franchise Disclosure Document?

I suggest starting with the items that test the franchisor’s track record and the claims made to you in the sales process, because they show the risk you are taking on. The FTC Franchise Rule sets out the disclosure document’s numbered items in 16 C.F.R. § 436.5, and 16 C.F.R. § 436.6(c) requires the franchisor to “Precede each disclosure Item with the appropriate heading,” so you can find each one by number. Five items deserve the first read:

1. Item 3: Litigation. Under 16 C.F.R. § 436.5(c), Item 3 discloses specified lawsuits and actions involving the franchisor, a predecessor, certain parents and affiliates, and the people who manage franchise sales or operations.
2. Item 19: Financial Performance Representations. Item 19 holds the earnings or sales figures the franchisor includes in its disclosure document, and under 16 C.F.R. § 436.5(s) the franchisor “must have a reasonable basis and written substantiation for the representation at the time the representation is made.” My page on Item 19 financial performance representations covers its required statements.
3. Item 20: Outlets and Franchisee Information. Item 20 must “Disclose the names of all current franchisees” (or a state-based list), and it lists “every franchisee who had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year or who has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.” Former franchisees can describe the system without a stake in your purchase. Item 20 must also “Disclose whether franchisees signed confidentiality clauses during the last three fiscal years,” which tells you whether some of them may decline to talk.
4. Item 21: Financial Statements. “Except as provided in paragraph (u)(2) of this section, these financial statements must be audited by an independent certified public accountant.” They show whether the franchisor has the money to deliver the support it promises.
5. Item 22: Contracts. Item 22 requires the franchisor to “Attach a copy of all proposed agreements regarding the franchise offering, including the franchise agreement and any lease, options, and purchase agreements.”

I suggest measuring what the salesperson tells you against Item 19, because federal and Minnesota rules both reach sales talk. 16 C.F.R. § 436.9(c) bars a franchisor from giving financial performance representations “unless the franchisor has a reasonable basis and written substantiation for the representation at the time the representation is made, and the representation is included in Item 19.” Minnesota adds its own rule. Minn. Stat. § 80C.13, subd. 2 provides that no person may offer or sell a franchise in Minnesota “by means of any written or oral communication which includes an untrue statement of a material fact or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”

The Minnesota Department of Commerce rule on deceptive practices, Minn. R. 2860.4500, reaches a statement “that is contrary to any disclosure made in the public offering statement.” It also reaches income projections made “without written disclosure of the number of the franchisor’s existing franchised businesses that have, to the franchisor’s knowledge, actually attained that projected level.” If a sales pitch includes numbers, I suggest asking for them in writing, because a written figure is the evidence you would need if it proves untrue.

How Does Minnesota Law Change the Franchise Agreement You Sign?

Minnesota law overrides parts of a franchise agreement for the buyers it protects, so the printed terms are not the whole deal. Minn. Stat. § 80C.21 provides that any provision, “including any choice of law provision,” that would waive compliance with the Act is void if it purports to bind a person “who, at the time of acquiring a franchise is a resident of this state, or, in the case of a partnership or corporation, organized or incorporated under the laws of this state,” or “a person acquiring any franchise to be operated in this state.” A clause choosing another state’s law cannot take away the Act’s protections from a buyer in one of those groups. For a buyer outside them, § 80C.21 does not void the clause, and the agreement’s chosen law may govern.

The Department of Commerce rule on unfair practices, Minn. R. 2860.4400, applies to “All franchise contracts or agreements and any other device or practice of a franchisor.” Under item J, it is unfair and inequitable to “require a franchisee to waive his or her rights to a jury trial or to waive rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction, or to consent to liquidated damages, termination penalties, or judgment notes.” The same item adds “provided that this part shall not bar an exclusive arbitration clause.” An agreement that sends disputes to arbitration can therefore stand, while a clause stripping your Minnesota remedies cannot.

A franchisor selling in several states may attach a Minnesota addendum or rider that changes its national form. I suggest reading the rider side by side with the sections it amends, because the rider’s text shows which national-form terms it replaces.

Minnesota also limits how the relationship ends. Minn. Stat. § 80C.14, subd. 3 provides: “No person may terminate or cancel a franchise except for good cause.” Under paragraph (a) of the same subdivision, termination also requires “written notice setting forth all the reasons for the termination or cancellation at least 90 days in advance of termination or cancellation,” and it requires that “the recipient of the notice fails to correct the reasons stated for termination or cancellation in the notice within 60 days of receipt of the notice.” The paragraph lists exceptions where “the notice is effective immediately upon receipt.” Check the current text of the statute before relying on these periods. Subdivision 4 provides that “no person may fail to renew a franchise unless (1) the franchisee has been given written notice of the intention not to renew at least 180 days in advance of the expiration of the franchise,” and it adds a second condition. Under the subdivision’s opening words, those nonrenewal conditions do not apply where the nonrenewal is for good cause and “the franchisee has failed to correct reasons for termination as required by subdivision 3.” For a franchise under which a refiner or distributor “authorizes or permits a retailer or distributor to use, in connection with the sale, consignment, or distribution of motor fuel, a trademark which is owned or controlled by such refiner or by a refiner which supplies motor fuel to the distributor which authorizes or permits such use” (15 U.S.C. § 2801(1)(A)), the federal Petroleum Marketing Practices Act provides that, to the extent its provisions apply to termination or nonrenewal, no state may “adopt, enforce, or continue in effect” a termination, nonrenewal, or notice provision “unless such provision of such law or regulation is the same as the applicable provision of this subchapter” (15 U.S.C. § 2806(a)(1)).

Under 16 C.F.R. § 436.5(q), Item 17 of the disclosure document, titled “Renewal, Termination, Transfer, and Dispute Resolution,” includes “a table that cross-references each enumerated franchise relationship item with the applicable provision in the franchise or related agreement.” My page on Minnesota franchise termination covers the termination and nonrenewal rules in full.

One federal rule protects what you read before signing. 16 C.F.R. § 436.9(h) makes it a violation for a franchise seller to “Disclaim or require a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” The same paragraph states that it “is not intended to prevent a prospective franchisee from voluntarily waiving specific contract terms and conditions set forth in his or her disclosure document during the course of franchise sale negotiations.”

What Does a Personal Guarantee Commit You To?

A personal guarantee makes you, as an individual, answerable for what your franchise company owes if the company does not pay or perform. The guarantee is its own contract, and its wording sets how far your personal exposure reaches. If you sign one, forming an LLC or corporation to hold the franchise does not by itself keep your personal assets out of reach for the obligations the guarantee covers.

The disclosure rules put the guarantee in front of you before you sign. Under 16 C.F.R. § 436.5(v), Item 22 requires the franchisor to attach “all proposed agreements regarding the franchise offering.” For a franchise subject to registration, Minn. Stat. § 80C.06, subd. 5 requires delivery of “all proposed agreements relating to the sale of the franchise” at least seven days ahead. For “each financing arrangement, including leases and installment contracts, that the franchisor, its agent, or affiliates offer directly or indirectly to the franchisee,” 16 C.F.R. § 436.5(j) requires Item 10 to state “Whether a person other than the franchisee must personally guarantee the debt.” A footnote to that item states that “Indirect offers of financing include a written arrangement between a franchisor or its affiliate and a lender, for the lender to offer financing to a franchisee.” Minn. R. 2860.4500 also treats it as deceptive to misrepresent “that the franchise agreement and all of its obligations is or are embodied in one or several documents presented” when additional documents are in fact required to obtain the franchise.

When you read the guaranty form, these questions define your exposure:

• What it covers. Does it reach only royalties and fees, or every obligation under the franchise agreement, the lease, and any franchisor financing?
• Whether it has a ceiling. A dollar cap, or a cap tied to a number of months of royalties, limits what you can owe personally.
• When it ends. Does it end when you transfer the franchise with the franchisor’s approval, or continue after you sell?
• Who must sign. Does the franchisor require every owner, or a spouse who owns no part of the business, to sign?

A franchisor may decline to change its form, and you then decide whether the franchise is worth the exposure as written. My page on personal guarantees in franchise deals describes the types of guarantees and their limits.

What Changes When You Buy an Existing Franchise From Its Owner?

When you buy an existing location from its current franchisee, Minnesota’s registration and delivery duties may not apply to the seller, so you need to gather more of the information yourself. Minn. Stat. § 80C.03, paragraph (a), exempts from registration “the offer or sale of a franchise owned by that franchisee . . . if the sale is not effected by or through a franchisor.” It adds that “A sale is not effected by or through a franchisor merely because a franchisor has a right to approve or disapprove a different franchisee.” It also provides that “no person shall make more than one sale during any period of 12 consecutive months of a franchise or area franchise granted by a single franchisor.” Because the seven-day duty in § 80C.06, subd. 5 runs to a franchise “subject to the registration requirements,” an exempt resale may come with no disclosure document from the seller.

The federal Rule draws a similar line. A “franchise seller” under 16 C.F.R. § 436.1(j) “does not include existing franchisees who sell only their own outlet and who are otherwise not engaged in franchise sales on behalf of the franchisor.” Under 16 C.F.R. § 436.1(t), a sale “does not include the transfer of a franchise by an existing franchisee where the franchisor has had no significant involvement with the prospective transferee.” The Minnesota exemptions in § 80C.03 lift “The registration requirement imposed by section 80C.02.” Minn. Stat. § 80C.13, subd. 2 still bars any person from selling a franchise in Minnesota through a written or oral communication that includes an untrue statement of a material fact or a misleading omission.

A letter of intent can mix binding terms, such as confidentiality or exclusivity, with terms the parties mean only as a statement of the deal they expect to sign. In a commercial lease dispute, Metro Office Parks Co. v. Control Data Corp., 205 N.W.2d 121 (Minn. 1973), the Minnesota Supreme Court stated that “A letter of intent may be binding if the parties, as a matter of fact, manifest an intent that it be so,” and that the label “is not alone determinative.” I suggest stating in the letter which terms bind and which do not, because the label alone does not settle it. After the letter of intent, these items deserve attention before the purchase agreement:

1. The franchisor’s approval. Under 16 C.F.R. § 436.5(q), the Item 17 table in the franchisor’s disclosure document cross-references “Conditions for franchisor approval of transfer” and “Franchisor’s right of first refusal to acquire franchisee’s business.” A right of first refusal can let the franchisor take the deal on your terms, so I suggest confirming whether it exists before you spend money on diligence.
2. Consent standards. Minn. Stat. § 80C.14, subd. 5 makes it “unfair and inequitable for a person to unreasonably withhold consent to an assignment, transfer, or sale of the franchise whenever the franchisee to be substituted meets the present qualifications and standards required of the franchisees of the particular franchisor.” The franchisor’s current standards, which it applies to you as the buyer, may include signing its current form of agreement. My page on selling a franchise in Minnesota covers this rule from the seller’s side.
3. The seller’s records. The Item 19 preamble required by 16 C.F.R. § 436.5(s) states that other financial performance information “may be given only if: (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this Item 19.” I suggest making the seller’s profit-and-loss statements and tax returns a condition of moving forward, because they are the direct evidence of what the location earns.

One prospective buyer wrote to me after submitting a letter of intent for an existing location. I noted that the deal depended on the franchisor approving the LLC that would become the franchisee and on the landlord transferring the lease. Transfer fees, a new franchise agreement, or required upgrades could change what the business was worth to that buyer. An earlier attempt by the same buyer to buy an existing franchise fell through because the seller did not want to provide profit-and-loss statements up front.

How Is a Master or Area Franchise Treated Under Minnesota Law?

Minnesota law treats a master franchise that carries the right to sell franchises as an “area franchise,” and its buyer, the subfranchisor, gets the Act’s protections. Minn. Stat. § 80C.01, subd. 7 defines an area franchise as an agreement “whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or in behalf of the franchisor.” Unless the Act states otherwise, its term “franchise” includes an area franchise. Subdivision 8 defines a subfranchisor as “a person to whom an area franchise is granted,” and subdivision 5 provides that “Unless otherwise stated herein, franchisee shall also include subfranchisor.”

Two consequences follow for the buyer of a master franchise:

1. Your purchase is protected. The registration rule applies to the master franchise sold to you unless an exemption fits, and so do the delivery and misrepresentation rules. Minn. Stat. § 80C.17, subd. 1 makes a violator liable “to the franchisee or subfranchisor.”
2. Your own sales are regulated. Once you sell unit franchises in Minnesota, Minn. Stat. § 80C.02 applies to you as well: “No person may offer or sell any franchise in this state” without an effective registration or an exemption. The delivery duty in Minn. Stat. § 80C.06, subd. 5 binds “Any person offering for sale or selling any franchise which is subject to the registration requirements imposed by section 80C.02.” The misrepresentation rule in Minn. Stat. § 80C.13, subd. 2, quoted in the disclosure section, bars untrue statements and misleading omissions of material fact in any Minnesota franchise offer or sale. Both reach your unit sales. Under the federal Rule, 16 C.F.R. § 436.1(j), a franchise seller “includes the franchisor and the franchisor’s employees, representatives, agents, subfranchisors, and third-party brokers who are involved in franchise sales activities.”

Some master agreements grant only the right to open several of your own units, with no right to sell franchises to others. That grant does not fit the area-franchise definition in § 80C.01, subd. 7, which turns on the right “to sell or negotiate the sale of franchises.” Before you sign, I suggest confirming which kind of right the agreement grants, because selling franchises yourself brings the registration rule in § 80C.02 to your own sales.

What Happens If the Seller Skipped Registration or Misled You?

You can sue under the Act for damages, for rescission (undoing the purchase), or for other relief. Minn. Stat. § 80C.17, subd. 1 provides: “A person who violates any provision of this chapter or any rule or order thereunder shall be liable to the franchisee or subfranchisor who may sue for damages caused thereby, for rescission, or other relief as the court may deem appropriate.” Subdivision 3 adds that a suit may recover “the actual damages sustained by the plaintiff together with costs and disbursements plus reasonable attorney’s fees.”

In Martin Investors, decided under an earlier version of § 80C.17, the Minnesota Supreme Court affirmed relief for a franchisee who bought an unregistered franchise. The court described the award as “rescission of its contract with restitution of sums expended in setting up a business under the contract in order to place both parties at status quo ante the contract.” It reduced the award by the value of equipment the franchisee kept.

Rescission is not automatic for every violation. In Clapp v. Peterson, 327 N.W.2d 585 (Minn. 1982), also decided under an earlier version of the Act, the franchisee received the disclosure document on the day he signed and later sought rescission “after accepting and retaining the benefits of the franchise agreement for 22 months.” The court found that the technical violation “resulted in no harm” to him, held “that equitable defenses are available to a defendant in an action for rescission based on a technical violation of the Minnesota Franchise Act,” and affirmed the denial of rescission. I suggest raising a registration or delivery defect promptly once you learn of it, because continued operation under the agreement can weigh against rescission.

The Act also limits when you can sue. Minn. Stat. § 80C.17, subd. 5 provides: “No action may be commenced pursuant to this section more than three years after the cause of action accrues.” Check the current text of subdivision 5 before relying on that period. My page on Minnesota Franchise Act violations explains each remedy and who else may be liable.

Checking a Minnesota Franchise Before You Sign

The checks that protect you happen before you sign or pay. The first is confirming the registration or the exemption the seller claims. The others are getting the disclosure document and every proposed agreement in time, reading the agreement with its Minnesota rider, and deciding what personal guarantee you will accept. A resale or a master franchise changes which of those rules applies, so I suggest identifying the kind of deal first, because it tells you which documents the seller owes you. For other franchise questions, see my Minnesota franchise attorney page.

If you are considering a Minnesota franchise and want to know what to check on your deal, email [email protected] with a brief description. I can start an intake and conflict check before you send any confidential documents.