Large Franchisee Exemption

The amended Franchise Rule exempts franchise offers and sales to large entities – such as
airports, hospitals, and universities – that have been in business for at least five years and have a
net worth of at least $5 million.

What Type of Business Experience Is Required?

To qualify for the exemption, the large entity must have five years of prior business
experience. That experience, however, need not be in franchising, or even in the franchised
business in particular. For example, a hospital seeking to purchase a flower shop franchise could
qualify for the exemption, even though the hospital may not have any prior experience with
franchising or with the flower industry.

How Is Net Worth Determined?

To qualify for the large franchisee exemption, the prospective franchisee-entity must have
a net worth of $5 million. The net worth of an entity can readily be determined from the entity’s
balance sheet or other financial information, typically submitted as part the application process.

May the Experience and Net Worth of Parent and Affiliate Companies Be Considered?

When determining the prior experience and net worth of a franchisee-entity, franchisors
may consider the prior experience and net worth of the prospective franchisee’s affiliates and
parents. For example, a franchisor – such as a hotel – may wish to establish a separate
corporation for a particular transaction. It is possible, however, that the new spin-off corporation
will meet neither the net worth nor prior experience prerequisites. The amended Rule makes
clear that the prior experience and net worth of the parent may be considered in such
circumstances. Accordingly, franchisors may aggregate commonly-owned franchisee assets in
determining the availability of the large entity exemption.

CREDIT: The content of this post has been taken from the Federal Trade Commission’s document, Franchise Rule Compliance Guide.