Fractional Franchise | Exemption From Franchise Rule

Fractional Franchise Exemption

The amended Rule exempts the sale of fractional franchises. A fractional franchise relationship is created when the following two elements are present at the start of the relationship:

  • The franchisee, any of the franchisee’s current directors or officers, or any current directors or officers of a parent or affiliate, has more than two years of experience in the same type of business; and
  • The parties have a reasonable basis to anticipate that the sales arising from the relationship will not exceed 20% of the franchisee’s total dollar volume in sales during the first year of operation.

Whose Experience May Be Considered?

The amended Rule expands the original Rule’s list of individuals whose prior experience will satisfy the first element to include current directors or officers of a parent or affiliate. The experience of directors or officers of a parent or an affiliate may be considered, so long as those individuals’ prior experience has been in the same line of business.

What Does “Same Line of Business” Mean?

“Same line of business” means selling competitive goods, or being in a business that would ordinarily be expected to sell the type of goods to be distributed under the franchise. Accordingly, an independent ice cream store owner might qualify as a fractional franchisee if he or she were to enter into a franchise relationship with an ice cream cake supplier. However, the ice cream store owner would probably not qualify as a fractional franchisee if he or she were to enter into a franchise relationship to expand the product line to include items not typically found in ice cream stores, like greeting cards.

How Is Sales Volume Calculated?

When considering the second required element – whether increased sales volume from the fractional franchise relationship exceeds 20% of total sales – the parties may measure incremental sales resulting from the fractional franchise against total sales at all stores owned by-9 – the franchisee (franchised or non-franchised). For example, an individual owning several hardware stores may introduce a new product at one store only. The store owner should measure the increase in sales attributed to the new product against the aggregate total sales volume for all products sold through his or her businesses.

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

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