Franchisee 101: Match-Taker

Lewitt Hackman

A San Francisco franchisee of the It’s Just Lunch matchmaking system received an offer to buy the franchised business for about $146,000 with the final price to be determined. Under the offer, the actual purchase price would depend on future revenues. The franchise agreement gave the franchisor a right of first refusal and right to approve the transfer. A California appellate court ruled the franchisee did not receive a valid third-party offer for the franchisor to invoke its right of first refusal under the franchise agreement.

The franchisor exercised its right of first refusal, with some modifications. The franchisee rejected the franchisor’s offer, which had changed some terms and, therefore, did not mirror the third-party’s offer as required in the franchise agreement. The franchisee also claimed it preferred selling to the third-party because it had a stronger financial record and operating history.

The franchisor sued in California state court to enforce its right of first refusal. The third-party purchaser joined the suit to enforce its rights in the transaction. The trial court held that the third-party offer was invalid because it was not a fixed purchase price, as required by the agreement. Because it was invalid, there was no bona fide offer for the franchisor to match and no right of first refusal to be exercised.

The appellate court agreed [see: IJLSF LLC v. It’s Just Lunch International, LLC, Cal. App., 4th Dist. (July 16, 2021)]. The franchise agreement required the offer to state a “dollar amount.” Depending on future revenue, the purchase price could be anywhere between $146,000 and $1,460,000. On that basis, the appellate court held the third-party offer was uncertain and affirmed the trial court’s ruling.

The franchisee also argued the franchisor waived any claim of invalidity by exercising its right of first refusal. The appellate court remanded the case for a further determination whether the franchisor waived its right to object to the sale.

Many franchise agreements outline a process for franchisees to present franchisors with bona fide purchase offers for their businesses, and procedures for franchisors to exercise a right of first refusal. Franchisees should consult franchise counsel when attempting to sell their business to a third-party to ensure the offer terms conform to the franchise agreement. Franchisees should be aware of rights the franchisor may have to match a third-party offer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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