Focused on Franchise Law - August 2012

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FRANCHISOR 101:  EXPLORING EXEMPTIONS UNDER CALIFORNIA'S FRANCHISE INVESTMENT LAW-PART 1

Over the next several months, we will explore exemption based franchising in California. This month, we will provide an overview and consider the benefits and risks related to claiming exemptions. Next month, we will examine the most utilized exemptions. In October, we will briefly discuss the remaining, lesser known exemptions.

Under California's Franchise Investment Law (the "FIL"), it is unlawful to offer or sell "a franchise" in California unless the offering has been registered with the Commissioner of Corporations (the "Commissioner"), or it is exempt. An offering is a "franchise" if the business will be substantially associated with the franchisor's trademark, an element of control exists (i.e. a system or marketing plan substantially prescribed by the franchisor), and the franchisee pays a fee. Even if these elements exist, an offering may be exempt from registration under one of approximately 12 exemptions provided in the FIL, or by rule or order of the Commissioner.

From the franchisor's perspective, claiming an exemption holds the allure of saving time and money, avoiding certain risks related to supplying incomplete information, allowing the exchange of information otherwise restricted by the FIL and protecting confidential aspects of its franchise system from disclosure. On the flip side, choosing to claim an exemption is not a no-brainer. To start with, the exemption statutes are confusing and have varying requirements. For example, many exemptions require the franchisor to pay a fee and file Notice with the Department of Corporations (the "DOC") annually. Others require the franchisor to file Notice within 15 days of each exempt transaction. Some exemptions apply to both registration and disclosure. Others apply only to registration, which means that while the franchisor need not register its offering prospectus and franchise documents prior to making an offer or sale, it must, nonetheless, provide prospective purchasers with accurate disclosures in advance of signing any franchise documents or collecting any payments. If disclosure is required, the franchisor won't recognize the cost and time savings or confidentiality benefits it had hoped for.

With that basic overview in mind, we will be ready to look at the exemptions available under the FIL next month.

FRANCHISEE 101:  TAXES, 2013 AND SELLING YOUR FRANCHISE

Franchisees are business owners and operators, as well as investors. Think about it: when you bought your franchise, you hoped to make money along the way, but you also hoped to sell your franchised businesses some day for a profit. Timing is everything when it comes to selling any investment, and so it is with franchises. To be sure: selling your franchise will work out best if you plan ahead and consider all relevant factors-including taxes.

The Bush era tax cuts were scheduled to expire at the end of 2010, and many franchisees considered the advantages of selling their businesses at that time to avoid the impending capital gains and other tax increases. However, as a result of the November 2010 elections, the favorable tax rates were extended for an additional two years. The two years are up at the end of 2012, and, unless extended again, capital gains and income tax rates will rise substantially in 2013.

While there is still time left to sell in 2012, franchisees who are on the fence should consider the impact higher tax rates could have on them if they keep their businesses for an additional year or two. For example: if you own multiple locations and intend to downsize over the next couple of years, now might be the time to act to avoid paying an additional 5% to 8.3% in capital gains. If you are close to retirement, it might be a good idea to consult your accountant or tax planner to see how much more you might end up paying by waiting. And, if you are thinking about passing your franchised business along to your children, why not talk to an estate planning attorney now, just to cover your bases. We work closely with accountants and tax and estate planning attorneys and can refer you to qualified advisors to consult with, if need be.

What's right for one person may not be right for another. But, it would be nice to keep more of what you've earned. When it comes to taxes, know your options and plan ahead, especially now that tax rate increases may be just a few months away. For a more detailed discussion on this topic, see this month's Contributing Expert article by Bob Woolway of Trinity Capital: You Should Consider A Liquidity Event Now.