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Franchisor Considerations in Franchise Transfers and First Rights of Refusal

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By: Lance Winslow

In the world a franchising it often becomes necessary to allow a franchisee to transfer their franchise rights to a new entity or individual. It is kinda disconcerting to see all your hard work in the training of the franchisee and marketing go to waste. If it is a really good strong franchisee, often this is upsetting because replacing such a great franchisee may be next to impossible for the particular market.

But as we know all things change incensed change is the only constant, it is something we franchisors have to deal with. Having been in franchising for nearly two decades, it became apparent to me, that often it was best for us to buy out the franchisee and run that particular franchise outlet as a company-owned store. Thus we needed to be assured first rights of refusal in the case the franchisee wished to sell out their rights. Below is a clause that I designed and put into our franchise agreements for this very purpose;

5.6 Right of First Refusal

If at any time during the term of this Agreement Franchisee (or Master Franchisee) receives a bona fide offer to purchase the Franchised Business, which offer Franchisee is willing to accept, Franchisee must give Franchisor written notice of the terms of the offer and the name of the offeror. Franchisor may elect to purchase the Franchised Business on the same terms as contained in the offer within sixty (60) business days after Franchisor’s receipt of the offer, except that in place of any non-cash consideration described in such offer, Franchisor may pay the fair market value thereof in cash. If Franchisor fails to give written notice of election or declines election within the sixty (60) business days, Franchisee may sell to the offeror on the terms offered, subject to the provisions relating to transferability as set forth on this Section 5, provided that such sale must be consummated within ninety (90) calendar days after the expiration of such sixty (60) business day period; otherwise the restrictions of this Section 5.6 shall be renewed and any sale or transfer by Franchisee of its interest in this Agreement, whether to such offeror or other individual or entity, shall again be subject to the restrictions of this Section 5.6. In the event Franchisor elects to purchase, the purchase must be completed within ninety (90) calendar days from the date of Franchisor’s notice of election to purchase. For purposes of this Section 5.6, the term “fair market value” of any noncash consideration shall mean the fair market value of such property as determined by agreement of Franchisee and Franchisor; provided, however, that if the parties are unable to reach such agreement within sixty (60) business days after Franchisor’s receipt of the offer, then the fair market value of such property will be determined by one appraiser chosen by the parties, who will determine the value of such property. In the event that the parties are unable to agree upon such an appraiser, the parties agree that the United States office of the American Arbitration Association (“AAA”) closest to our corporate offices will be employed to chose an appraiser and such person will determine the fair market value for these purposes. In the event the appraisal process is utilized, the party whose valuation of such property less closely approximated the value pursuant to the above-described appraisal process, measured by dollar amounts and not percentages, will pay all costs of the appraisal process. Any delay caused by such appraisal process or the parties’ disagreement over the fair market value of any non-cash property will extend the period in which Franchisor is to act under this Section 5.6 by that number of calendar days equal to the period of the delay.

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This is an issue that all franchisors will have to deal with and it behooves them to consider all the possible options in advance and to have those in the original franchise agreement. You would be well advised to talk to an experienced franchise attorney on how to design a clause in your franchise agreement that will best protect your company and is fair to the franchised buyer. You will save your self a lot of trouble down the road if you do this. I hope you will consider this in 2006.

Lance Winslow - Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance; www.WorldThinkTank.net/wttbbs/

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