Buying or selling a franchise in Texas: the state rules, the federal rules, the tax

The Texas picture in four sentences

Texas does not require a franchisor to register its franchise offering, provided it complies in all material respects with the Federal Trade Commission's disclosure requirements; instead, according to the Texas Secretary of State, the franchisor must file a one-time exemption notice before offering or selling. Buyers in Texas are protected mainly by the federal Franchise Rule, which requires a disclosure document delivered at least 14 days before signing or paying. The Texas franchise tax, despite its name, is a state privilege tax on most businesses and has nothing to do with franchising. Everything below is general information; a franchise attorney and a CPA should advise on your specific situation.

I am Avinash Nichkawde, founder and Group CEO of AN Global Group Holdings, with our head office in the Dallas area. We work with owners on both sides of franchising: businesses becoming franchisors, and buyers choosing a franchise. These are the Texas questions both groups ask me most often.

The federal rule does most of the work

Franchise sales anywhere in the United States are governed by the FTC's Franchise Rule. It requires franchisors to give prospective franchisees a disclosure document containing 23 specific items of information about the franchise, its officers and other franchisees. According to the FTC's consumer guide, the buyer must receive it at least 14 days before being asked to sign any contract or pay any money to the franchisor or its affiliate.

The document covers what a buyer most needs to know: litigation and bankruptcy history, every fee, the estimated initial investment, restrictions on suppliers and territory, training, renewal and termination terms, any earnings claims, openings and closings with contact details for current and former owners, and the franchisor's audited financial statements. For a Texas buyer, this document is the main source of protected information, which is why reading it carefully matters so much here.

What Texas asks of a franchisor: the exemption notice

Texas regulates business opportunities through its Business Opportunity Act, and the Secretary of State explains how franchises fit. A franchisor is exempt from filing a Texas registration statement if it complies in all material respects in Texas with the applicable federal disclosure requirements. Before offering for sale or selling, however, the seller must file an exemption notice with the Secretary of State.

The Secretary of State's guidance gives the practical details. The filing fee for the exemption notice is $25, and the notice has no term or expiration date; it is a one-time filing. The office is careful to describe its role narrowly: it does not decide whether a person must register, it is simply the filing office for the documents the Act requires, and enforcement of the Act is the jurisdiction of the Texas Attorney General.

For a business in Dallas becoming a franchisor, the practical message is that the Texas step is simple but not optional, and it has to happen before you offer franchises. It also depends on your federal compliance being right, which is why the disclosure document has to be prepared properly by a franchise attorney. If you are considering doing parts of the build yourself, my guide to franchising a business on your own explains where the legal line falls.

• Comply in all material respects with the federal disclosure requirements
• File the Texas exemption notice before offering or selling
• Keep the filing current if your business details change; ask your attorney how
• Check the rules separately for every other state where you will offer franchises

What this means for a buyer in Texas

Because Texas relies on the federal disclosure rule rather than reviewing franchise documents itself, your own diligence carries more weight. No state examiner has read the disclosure document on your behalf. That makes the reading, the calls to current and former owners, and the attorney's review your real protection.

Ask the franchisor to confirm that it has filed its Texas exemption notice. Read the disclosure document in full during the 14-day period, not on the last evening. Pay particular attention to Item 17, which explains renewal, termination, transfer and how disputes are resolved, including whether they go to court or arbitration and where. A dispute clause that sends every disagreement to a distant state is worth understanding before you sign. If you are not sure what to ask, the questions for a franchisor and its owners gives you a structured list.

The FTC's consumer guide also suggests that buyers check the disclosure document for state-specific information or contact their state attorney general or consumer affairs office for information about state protections.

The Texas franchise tax is not about franchising

This confuses almost everyone who is new to Texas. The Texas Comptroller describes the franchise tax as a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. It applies to many kinds of businesses, franchised or not, and a franchisee's company is treated like any other entity.

The Comptroller publishes the current thresholds and rates. For the 2026 and 2027 report years, the no tax due threshold is $2,650,000, and the rates are 0.375 percent for retail or wholesale and 0.75 percent for other businesses. The annual franchise tax report is due May 15, moving to the next business day if that date falls on a weekend or holiday. The Comptroller notes that rates, thresholds and deduction limits vary by report year, so always check the current figures.

Even a business below the threshold may have filing obligations, so ask your CPA what your entity must file each year. A small-business CPA such as a Dallas CPA who works with owner-run companies can set this up correctly from the first year.

Income tax, entities and the questions for your CPA

Texas has no state personal income tax, which many owners relocating here welcome. That does not mean a franchise business has no state tax exposure: the franchise tax applies to entities, sales tax may apply to what you sell, and federal income tax applies as it would anywhere. The choice of entity for your franchise affects all of these, as well as liability and how you can later sell.

Before you sign, sit down with your CPA and your attorney together if you can. Decide which entity will sign the franchise agreement and the lease, who will personally guarantee what, and how money will move between the business and your household.

• Which entity should own the franchise and sign the lease?
• Will the franchisor or landlord require a personal guarantee?
• Which state and federal filings will the business owe each year?
• Does sales tax apply to what the franchise sells?
• How should the entity be set up if I might sell the unit later?

Selling or transferring a franchise you already own

Selling an existing franchise is mostly governed by the franchise agreement rather than by state rules. Item 17 of the disclosure document describes what you must do to sell, and Item 6 lists any transfer fees. Agreements commonly require the franchisor's approval of the buyer, and some require the buyer to complete training or sign the franchisor's current form of agreement, which may have different terms from yours. Read your own agreement before you list the business.

There is one useful exception in the earnings rules. The FTC's consumer guide notes that while franchisors may make financial performance claims only in Item 19, the actual records of an existing outlet that a buyer is considering purchasing can be shared. If you are selling, organized financial records for your unit are the most persuasive thing you can offer a buyer.

Plan the sale well before you need it. Talk to the franchisor early about its transfer process and timing, ask your CPA how the sale will be taxed, and have a franchise attorney review what you owe the franchisor after you leave, including any restrictions on competing. The FTC's consumer guide notes that non-compete restrictions can last up to three years after termination, so know what your agreement says before you plan your next venture.

Local steps that sit outside franchise law

Franchise law is only one layer. Opening a franchised location involves the same local steps as any business: forming the entity, obtaining the city's permits and approvals for your space, meeting the landlord's requirements, setting up payroll and insurance, and registering for any state taxes that apply. The franchisor's opening plan usually lists these, but the responsibility for completing them is yours.

Build them into your timeline early. Permits and build-out approvals can take longer than buyers expect, and rent often starts before the doors open. If you are on the franchisor side, how long it takes to franchise a business shows where the Texas filing fits into the overall build.

How we help on both sides of the table

For owners becoming franchisors, we build the franchise system and coordinate with your franchise attorney so the disclosure document, the Texas exemption notice and any other state filings are in place before recruitment begins. For buyers, we match you with franchises in the sector and investment range you want from the hundreds of U.S. brands I represent, and help you evaluate them, while your attorney and CPA handle the legal and tax advice.

Either way, the first step is a consultation at our office or by video. Bring what you have, whether that is a business you want to franchise or a shortlist of brands you are considering, and we will tell you plainly what the next steps are and who should be involved.

Questions people ask me