Jump To Navigation

Posts tagged "buyer"

What is a First Right of Refusal and When would a Franchisor exercise a First Right of Refusal?

A first right of refusal is an option retained by the franchisor, to meet the purchase price and terms of a potential sale that a franchisee enters into with a potential buyer. In other words, say a franchisee negotiates to sell his franchised business at a certain price on certain terms, the franchisor can choose to exercise it's option and become the buyer, effectively knocking out the original buyer. Why would a franchisor do this? Generally for 2 reasons. Unlike the previous blog on an overpriced sale, the situation where the price agreed to is so under market and so low as not supported by any stretch of the imagination given the sales of the company and the asset to debt position, and the franchisor simply does not want the franchisee to "give away" the business, and will choose to meet the price and terms, to either retain the unit as a company owned, or to re-sell it at market price. The other reason would be that the franchisor is simply trying to build up its company owned set of units with already existing base of sales. It is also possible that the franchisor does not want a particular buyer as an owner in its system, such as someone related to a competitor. In general franchisors do not frequently exercise this option although it is in virtually all franchise agreements, just in case. Usually there is a time period allowed for the franchisor to make this decision. If the franchisee and buyer seek to close the transaction sooner, they can ask that the franchisor waive its right of first refusal right away. It is important to consult a franchisee attorney to assist in the sale of a franchise in order to avoid any surprises which the franchisor may have the right to insist upon. I am a California Franchise attorney with over 25 years experience in the purchase and sale of franchises and will protect YOUR interests.

Can a Franchisor NOT Approve a Franchisee's Qualified Buyer Based on Too High of Price?

Recently I answered the question from a franchisee looking to sell his franchise, can a Franchisor's not approve a qualified buyer on the basis that the franchisee's price was "too high"? The franchisee was virtually dumbfounded that a franchisor would nix a sale based on a too high price when the buyer was very qualified. While this seems at first to be shocking and unreasonable-how can a franchisor dictate what price a buyer and seller agree on, I went through the scenario as I believe was the franchisor's position. First, all franchise agreements do require the franchisor's consent to any proposed sale. The franchisor wants to be sure the buyer has the financial qualifications and resources to not only complete the purchase but to operate the business as a new owner taking time to get up to speed. The franchisor is aware that the new owner will likely lose a percentage of customers who had personal relationships with the departing owner, so there could be an initial dip in sales which may not recover right away. In the situation of this franchisee, the Franchisor may have been more aware of the financial strain the monthly debt financing of a very above market price could have on the cash flow of the day to day operations. Additionally the Franchisor would likely have been concerned with liability from the BUYER down the road when cash flow could not be improved fast enough, for approving the sale knowing the price was so much higher than it should have been, and how that debt financing would impact the buyer's probability of failure. Franchisor's will very rarely deny a sale of a qualified buyer since it is in everyone's best interests to have a sale proceed with a new, eager franchisee. But when the price is so far out of "reasonableness" the Franchisor has to take a step back and make that difficult decision, since if it approves such a sale, the chances of failure are too high. On the other hand, if the price were just a bit high or a "top price" that is probably not enough to justify a Franchisor denial, absent other facts that would support the denial. If you are a franchisee needing to sell and have a buyer that your franchisor is denying for what may be an unreasonable basis call an experienced franchise attorney, such as my self, right away to go over your specific situation.

Contact Us Now

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Privacy Policy | Business Development Solutions by FindLaw, part of Thomson Reuters.

FindLaw Network