A San Francisco franchisee of the It’s Just Lunch Matchmaking System has received an offer to purchase from the franchise business for approximately $ 146,000, the final price to be determined. Under the offer, the actual purchase price would depend on future income. The franchise agreement gave the franchisor a right of first refusal and the right to approve the transfer. A California appeals court ruled that the franchisee did not receive a valid offer from a third party for the franchisor to invoke its right of first refusal under the franchise agreement.
The franchisor has exercised its right of first refusal, with some modifications. The franchisee rejected the franchisor’s offer, which changed some conditions and therefore did not reflect the third party’s offer as required by the franchise agreement. The franchisee also claimed that he preferred to sell to a third party because he had a stronger financial record and operating history.
The franchisor brought an action in the state court of California to assert its right of first refusal. The third party purchaser joined the action to assert its rights in the transaction. The trial court ruled that the third party’s offer was invalid because it was not a fixed purchase price, as required by the agreement. Because it was invalid, there was no good faith offer for the franchisor to match and no right of first refusal to exercise.
The Court of Appeal accepted [see: IJLSF LLC v. Itâs Just Lunch International, LLC, Cal. App., 4th Dist. (July 16, 2021)]. The franchise agreement required the offer to state a âdollar amountâ. Depending on future revenues, the purchase price could be between $ 146,000 and $ 1,460,000. On this basis, the court of appeal considered that the offer of the third party was uncertain and upheld the decision of the court of first instance.
The franchisee also argued that the franchisor had waived any claim for nullity by exercising its right of first refusal. The appeals court remanded the case to be determined whether the franchisor had waived its right to object to the sale.
Many franchise agreements describe a process for franchisees to make bona fide purchase offers for their businesses to franchisors, as well as procedures for franchisors to exercise a right of first refusal. Franchisees should consult a franchise advisor when attempting to sell their business to a third party to ensure that the terms of the offer comply with the franchise agreement. Franchisees should be aware of the rights the franchisor may have to match an offer from a third party.