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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.

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