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Selected Pitfalls to Avoid in the Sale of Refranchised Units
The sale of company units to franchisees (“refranchising”) differs from a traditional asset sale because the transaction contemplates a continuous business relationship between the parties. The basic terms of this relationship should be outlined in a letter of intent and will be contained in the provisions of the various transaction documents, including the Asset Sale Agreement (ASA), related transfer documents, such as deeds, leases, subleases, assignments, bills of sale, etc., one or more franchise agreements and, if the obligation to develop additional units is part of the transaction, a development agreement. This article continues the discussion of refranchising in last month's issue by reviewing some of the issues that the parties should consider carefully as they document their on-going relationship post closing.
Generally the seller is unwilling to modify the basic form franchise agreement and the development agreement, except if required due to factors unique to the transaction. It is a fundamental tenet of franchising that all franchisees should be treated equally so that the system can be run in a uniform manner. Buyers are often able to obtain financial concessions: for example, reductions in, or waivers for periods of time, of royalties or other payments, to compensate for marginal or underperforming units which the seller wants to sell and the buyer would not otherwise be inclined to buy. If the term of an underlying lease that is to be assigned to a buyer is less than the standard franchise agreement term, the term of the franchise may be reduced to match the remaining term under the lease.
The development agreement will have to address issues such as:
- whether the buyer/franchisee must develop additional units and the timing of such development;
- whether the buyer will have a right of first refusal to develop in the market;
- whether the buyer will have the exclusive right to develop the market, as opposed to the seller retaining the right to develop additional company stores;
- the cost and timing of any development fees to be paid by the buyer for the rights under the agreement; and
- whether the buyer will have any additional redevelopment, renovation, or remodeling obligations regarding the stores being purchased over and above any general requirements applicable to all franchisees under the standard franchise agreement.
The buyer should be careful to understand the impact of “nontraditional” development by the seller in a market, especially if the buyer has paid additional consideration for “exclusive territory” rights. If the seller is permitted to continue to develop nontraditional units or to grant franchise rights for such nontraditional units, this could negatively affect the value of an “exclusive territory” provision. In this situation, the definition of “nontraditional” development becomes critical. Franchisors often seek to define units located in service stations, public facilities, or schools and/or the utilization of “express” or “limited service/menu” units as “nontraditional.” In addition, the increasing use of multibranded outlets (more than one franchise concept is housed in the same building) also could affect the buyer's market if such multibranded development is considered nontraditional.
Major Differences In UK, U.S. Copyright Laws
This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
Strategy vs. Tactics: Two Sides of a Difficult Coin
With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.
Removing Restrictive Covenants In New York
In Rockwell v. Despart, the New York Supreme Court, Third Department, recently revisited a recurring question: When may a landowner seek judicial removal of a covenant restricting use of her land?
Legal Possession: What Does It Mean?
Possession of real property is a matter of physical fact. Having the right or legal entitlement to possession is not "possession," possession is "the fact of having or holding property in one's power." That power means having physical dominion and control over the property.