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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.

Litigation Involving Franchise Earnings Estimates or Earnings Claims in California

One of the largest areas of disputes between the franchisor and franchisee relates to what are known as "earnings claims" - the estimate of what the franchisee will earn by purchasing the franchise. When things don't go quite according to plan the relationship between the franchisor and franchisee becomes strained. Franchisees will often point to claims made by the franchisor or their representation during the time of their initial discussions prior to the purchase of the franchise itself. They may claim that the franchisor or their representative(s) overpromised or exaggerated earnings estimates, and attempt to use this as the basis for a lawsuit.

Do I have to go to arbitration in my franchisor's home state, across the country?

Will an arbitration case be in the home state of the franchisor instead of California?  Not always. Many state's laws trump what's in the franchise agreement. Depending on the state the franchisee is located, that state law may overrule arbitration required locations outside the franchisee's state, regardless of the franchise agreement says. It is imperative that you have an experienced franchise arbitration attorney review both your franchise agreement and your states franchise laws once you are notified of a new arbitration against you. If the franchisor has to come across the country because of your state's laws, they may not want to do that, particularly if they have to drag 3 corporate witness and stay for 2 nights. If your state favors local arbitration and you have defenses and claims perhaps YOU as the franchisee may want to initiate an arbitration rather than having to react to a franchisor's demand for arbitration in an inconvenient location. If your state law is not in your favor, there are still potential solutions that may allow you to stay put such as determining if the franchisor potentially violated registration or disclosure laws Franchise law is highly regulatory and attention to detail is necessary. Sometimes those details are missed. This gives you the franchisee alternative arguments, for example where the franchisor has not given you a proper Franchise Disclosure Document with some state required extra language, or contains the required audited financial statements, or other current information which may contain errors. You may have more alternatives that you think on your side. Call me today for a review of your situation.

If my franchise agreement is terminated can I stay in the same business?

Most franchise agreements have some sort of post termination non-competition clauses. This is where a franchisee's particular state laws, most notably California laws, favor franchisees (ex-franchisees). California Business and Professions Code §16600 voids any provision in a contract which is a restraint on trade meaning, If you are a California ex-franchisee, the franchisor can not enforce the non-competition clause in your franchise agreement. They should not even be threatening to do so, and certainly can not bring an action against you for being in a similar business. So you are free to engage in the same or similar and competing business after the term of your franchise agreement. Be aware however, other prohibitions such as prohibition against soliciting clients of the former franchise, or against soliciting employees of the former franchise or of another franchisee, or against using any proprietary information gained by being a franchise, are very much enforceable. If you are intending to be in a competing business or are in one after your franchise agreement is terminated, it is wise to seek legal counsel to be sure you stay within the laws and not buy yourself a lawsuit which can potentially put you out of business for good. Caution is also recommended that you do not start up the competing business while your franchise agreement is still in effect.

My franchisor has a collections agency harassing me for the franchise debt I owe to my franchisor.

Sometimes franchisors will engage a collection agency to do the dirty work of collecting so they can remain out of the collection business. More often than not this happens after a franchisee has closed its doors and still owes the franchisor fees for prior months. Sometimes the franchisor has "assigned" the account to the collection agency for a percentage of the fees recovered so that agency will be extremely aggressive calling every day to the point of harassment. Collections agencies are required to comply with federal and state collection laws, including allowing the debtor to dispute the debt. What I recommend here is to demand copies of all contracts your signed and detailed verification of the debt. The agency is required to obtain that verification. Sometimes, the franchisor doesn't even have the signed agreements and therefore legally can not claim a valid debt. If the collector is violating the collection laws, then a cease and desist letter to that collector from an attorney is recommended. I also recommend a demand on the franchisor with regard to any shortfalls the franchisor did which may have contributed to the franchisee closing. I also scour the California franchise registration documents to determine if there are any violations. Don't be intimidated by the collections agency. Be aggressive right back. Especially if your rights have been trampled by the franchisor.

Being a "Franchisor" is Completely Different than Running a Successful Business

Before you became a franchisor, as a business person you were primarily focused on the well being and growth of your own business. You were focused upon the people working for you, the products and/or services going out the door, and the profits coming in. As a successful franchisor, you will be focused on adding value to your franchisees and the "brand" or "system" you're developing as a franchisor. Your primary task is to recruit, teach, train and support new and existing franchisees - focusing on their business. You will encounter challenges along the way within THEIR businesses, and help them to work through issues of under-capitalization, poor management and employee issues, recruiting and training problems and marketing initiatives. A successful franchisor is constantly improving their own "product", either expanding the product line offered to the franchisees, or improving the system used to implement the franchise strategy or lower costs through a more efficient supply chain. Successful franchisors enjoy the challenge of not only running their own business, but helping others to do so as well.

I Can Not Afford to Pay My California Franchise Fees Anymore

Running out of money is an unfortunate common situation among franchisees whether new or existing many years. The obvious solution for the franchisee is to pay the most important creditors first (payroll, vendors, rent, etc) and generally the franchisor takes a back seat when the franchisee is in financial strain. The key is work out a solution to the underlying business problem before the debt to the franchisor becomes insurmountable. Most franchisors will work with a struggling franchisee, even offering additional resources earmarked for such situations, like additional marketing assistance. Communication is the key. You need to stay in constant contact with the franchisor, and keep requesting specific assistance, and don't ignore the franchisor's collection calls. That will be seen as being non-cooperative. I have negotiated debt settlement agreements that reduce the franchisees debt over time based on other performances by the franchisee, showing that the franchisee is willing to implement the franchisors recommendations. It takes a creative attorney to fashion a creative solution to the issue at hand. If you are at the point where you believe all hope is lost, we can negotiate a mutual termination to the franchise agreement. In any case, do not clay in calling me to assist you in resolving your problems.

I am a Franchisee, Can I Require My Franchisor to Send Me their Latest Audited Financial Statements?

As a California franchisee, you can certainly ask, and if your franchisor says no, you can retrieve it from the California franchise registration website, since all franchise information is public and can be looked up. In fact you can look up the previous Franchise Disclosure Documents, see the changes that were made, see the comment letters received back from the state and see the response letters from the Franchisor. Interestingly, this information may be useful in many situations such as the original due diligence before purchasing the franchise. You can see pull up all previously registered FDDs and see the trends in store openings and closings beyond what is in the FDD you received. You can also see the trends in the audited financial statements, as well as trends in how the programs and fees may have changed over the years. The only time you would not be able to put up this information is if the Franchisor files an exemption to this registration requirement due to the Franchisor's high net worth (over $5 million); then you would only see the exemption notice.

What Kind of Audit do I need as a Franchisor in my Franchise Disclosure Document?

Part of the requirements of the Franchise Disclosure Document require the Franchisors audited financial statements in the form required by both the FTC Rule and your state requirements. Here are the basics:

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