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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.
Yachts, Jets, Horses & Hooch: Specialized Commercial Leasing Models
Defining commercial real estate asset class is essentially a property explaining how it identifies — not necessarily what its original intention was or what others think it ought to be. This article discusses, from a general issue-spot and contextual analysis perspective, how lawyers ought to think about specialized leasing formats and the regulatory backdrops that may inform what the documentation needs to contain for compliance purposes.
Hyperlinked Documents: The Latest e-Discovery Challenge
As courts and discovery experts debate whether hyperlinked content should be treated the same as traditional attachments, legal practitioners are grappling with the technical and legal complexities of collecting, analyzing and reviewing these documents in real-world cases.
Identifying Your Practice's Differentiator
How to Convey Your Merits In a Way That Earns Trust, Clients and Distinctions Just as no two individuals have the exact same face, no two lawyers practice in their respective fields or serve clients in the exact same way. Think of this as a "Unique Value Proposition." Internal consideration about what you uniquely bring to your clients, colleagues, firm and industry can provide untold benefits for your law practice.
Risks and Ad Fraud Protection In Digital Advertising
The ever-evolving digital marketing landscape, coupled with the industry-wide adoption of programmatic advertising, poses a significant threat to the effectiveness and integrity of digital advertising campaigns. This article explores various risks to digital advertising from pixel stuffing and ad stacking to domain spoofing and bots. It will also explore what should be done to ensure ad fraud protection and improve effectiveness.
Turning Business Development Plans Into Reality
This article offers practical insights and best practices to navigate the path from roadmap to rainmaking, ensuring your business development efforts are not just sporadic bursts of activity, but an integrated part of your daily success.