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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.

I want to sue my franchisor, and don't want to go to arbitration.

Can you sue your franchisor without having to go to arbitration first?  Many franchise agreements do have mandatory arbitration clauses, however state law will dictate which state governs, and which laws are not subject to arbitration. Additionally the franchise agreement itself will have exceptions for the issues that may be arbitrated. Although you may believe your rights best lay with litigation, it is always prudent to have an experienced franchise attorney first look at both your agreement, the state's laws where both the franchisor and the franchisee are located, as well as the registration documents for both states compared to what you received. This will give the full picture of the available remedies based on potential state law violations, which happen more often that not, and will determine potential remedies and options that you may not know even exist. Franchise law is highly regulated and if your Franchise Disclosure Document was deficient in any manner (and many are) then you have more options. Have a franchise expert review your situation before deciding on a course of action.

What about the post term non-compete clause in California franchise agreements?

Franchisors cannot include non-compete clauses because California law prohibits post term non-competition clauses in Business and Professions Code §16600. So why are they routinely in franchise agreements in California? The short answer is because most franchisors use the same document in all states. However, most franchisors will also have some sort of state addendum which outlines various laws of that state that override sections in the franchise agreement, such as California's B & P Code §16600. The reality is, even without the addendum or any other disclaimer language, such post term non-competition provisions are not enforceable in California, except in connection with a sale of the business, or other minor exceptions. However that is not the end of the story. California franchise law does not prohibit post term non-solicitation clauses, meaning a franchisee could be prevented from soliciting its customers after expiration or termination of the franchise agreement. A post-term non-solicitation clause can be very effective in achieving what a post-term non-competition clause can not. California franchise law also does not prohibit non-solicitation of current and former franchise employees. Finally all franchise agreements will have a confidentiality and/or trade secrets clause basically protecting all proprietary information given to or utilized by the franchisee during the franchise agreement term, from being utilized after the term for any reason. This would include not only the trademarked items, but the operations and all training manuals, and information and even all the marketing materials. Franchisees that are nearing the end of their term or in danger of having their franchise agreement terminated, would be wise to have an experienced California franchise attorney review the post term prohibitions for options and solutions in this regard.

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