Interpretive Opinion No. 71 / 43F
State of California Department of Corporations
James L. Kelly, Commissioner
In reply refer to: File No. _____
This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.
Mr. E. L. Olsen
ServiceMaster International Ltd.
2300 Warrenville Road
Downers Grove, IL 60515
Dear Mr. Olsen:
Consideration has been given by the Commissioner to the request contained in your letter dated July 26, 1971, as supplemented by your letter dated August 2, 1971, for reconsideration of the views expressed in our letter dated July 28, 1971, addressed to your Mr. C. D. Gustafson, and in our letter dated June 23, 1971, addressed to you, with respect to the proposed offer and sale of franchises by ServiceMaster International Ltd., formerly ServiceMaster Serv-Opp Int' 1, Corp. ( "International") . Based upon the additional factual information submitted with your letter dated July 26, 1971, and the representations contained in your and Mr. Gustafson's earlier letters dated respectively December 11, 1970 and May 4, 1971, it is our opinion that such offer and sale of franchises by International is exempted from the registration requirement of Section 31110 of the California Franchise Investment Law by virtue of the provision of Section 31101 of that Law.
You have represented that International is a wholly owed subsidiary of ServiceMaster Industries, Inc.("Industries"). International was forged on January 1, 1967, by Industries for the purpose of handling the general franchise division of Industries. Since January 1, 1967, International has sold the franchises which prior to that date and since January 1958, and as regards some of the franchises, since January 1948, had been sold by Industries. These franchises relate to carpet and rug cleaning, furniture cleaning, moth-proofing, soil retarding, static-proofing, smoke odor removal and floor cleaning. In excess of 500 franchises sold by International or Industries have been in effect in the United States at the end of each year since 1959. In addition, franchises have been sold in United States territories and foreign countries.
Various types of franchises are sold, including ServiceMaster Coordinator licenses apparently also referred to by you as "Master Franchise Coordinator licenses". ( "MFC"); ServiceMaster Associate licenses, apparently also referred to by you as "Service Associate franchises" ( "SAF" ) and Professional Building Maintenance licenses. The MFC, as presently sold, contemplates that its holder or International will establish SAFs for small independent operators in the MFC territory. MFCs are sold by International at prices ranging from $3,000 to $.50,000 with the higher priced franchises including the sale of a service business. In addition, International under the MFC receives 4%.of the gross receipts from service sales by the MFC and affiliated SAF's in the MFC territory. MFCs are granted for 3-year periods and may be renewed. SAFs are sold for $5,600, of which $1,600 is allocated as a franchise and training fee and $4,000 for the initial package of supplies. The holder of the SAF pays 10% of gross sales to the MFC or in open areas to International. SAFs are granted for 3-year periods and may be renewed. In its assigned territory, the holder of the SAF may use the service marks of International.
You have submitted an audited financial statement of International for the year ending December 31, 1970, showing net worth of $1,110,839. A note to the balance sheet showing such net worth, states that as at December 31, 1970, Industries had advanced $840,698 to International; that on July 7, 1971, the board of directors of Industries authorized the transfer, as of December 31, 1970, of $700,000 of these outstanding advances to paid in capital of International, and that the amount of paid in capital and advances by Industries appearing in International's balance sheet, where adjusted to reflect this transfer.
You also have submitted an audited consolidated financial statement of Industries for the year ending December 31, 1970, showing net worth of $5,924,101, and you have represented that no change in Industries' consolidated balance sheet will result from the transfer effected by its board of directors on July 7, 1971, of International advances to paid-in capital, as mentioned above.
Section 31101 of the Franchise Investment Law provides that there shall be exempted from the disclosure and registration requirements of Chapter 2 of Part 2 of the Law, and especially from the registration requirement of Section 31110, the offer and sale of a franchise if the standard as to financial condition set forth in Subdivision (a) and the standard as to scope of operations set forth in Subdivision (b) of the Section are met, and provided further that the franchisor complies with the disclosure requirements specified in Subdivision (c) of the Section.
Assuming that at the time of the offer and sale of franchises by International, the aforementioned balance sheets of Industries and International are the most recent financial statements of these corporations respectively, as required in the standard as to financial condition set forth in Subdivision (a), we are of the opinion that that standard is satisfied, because it appears therefrom that International, the franchisor, has a net worth of not less than $1,000,000, and Industries, which owns 100% of International, has a net worth on a consolidated basis of not less than $5,000,000.
With regard to the standard as to scope of operation set forth in Subdivision (b) of Section 31101, Rule 300.100 effective .March 17, 1971, as above stated, provides that that standard is satisfied if throughout the five year period immediately preceding the offer and sale of a franchise the franchisor and/or any corporation owning at least 80% of the franchisor, has had at least 25 franchisees conducting business which is the subject of the franchise. As above stated, you have represented that Industries, which owns 100% of International, or International has had in excess of 500 franchises in effect in the United States at the end of each year since 1959. Thus at this time International meets the standard as to scope of operations set forth in subdivision (b).
Therefore, assuming that International in connection with the proposed offer and sale of franchises, will comply with the disclosure requirements specified in Subdivision (c) of Section 31101, such offer and sale in our opinion is exempted from the registration requirement of Section 31110 by virtue of Section 31101, as long as International continues to meet the standard as to financial condition set forth in Subdivision (a) and the standard as to scope of operations set forth in subdivision (b) of said Section.
Dated: San Francisco California
August 12, 1971
By order of
JAMES L. KELLY
Acting Commissioner of Corporations
HANS A. MATTES
Office of Policy