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What is the right of first refusal in franchising?

| Jun 8, 2018 | business formation & planning |

When entering into a franchise agreement, there are many issues to carefully consider for all parties involved. Whether you are considering franchising out your existing business or weighing the pros and cons of becoming a franchisee yourself, you must always examine the franchise agreement very closely to identify terms that place you at a disadvantage or that may cause complications at a later time.

One important issue to address in any franchise agreement is the inclusion of the franchisor’s right of first refusal. This is a principle used in many types of business agreements. However, in the context of franchising, it generally means that the party acting as the franchisor has the right to buy the franchisee’s business if he or she chooses to transfer the business or if the agreement ends as scheduled.

Practically speaking, this means that the franchisor may purchase the business operations, equipment and similar assets before the franchisee offers to sell them to any other party. Depending on the nature of the deal and the underlying franchise, this may benefit one party or the other substantially, but generally favors the franchisor. That’s because it constrains the opportunities of the franchisee to benefit from the sale in a timely way. It may also complicate other buyers’ interest in the business. However, this is a fairly standard component of a franchise agreement and should be treated as such.

Before you enter into a franchise agreement, you must take great care to consider the risks and potential benefits. The time and resources that you spend performing this due diligence may go a long way toward preserving your interests and rights in a volatile business landscape.

Source: Entrepreneur, “The 19 Covenants of a Standard Franchise Agreement,” Rick Grossmann, accessed June 08, 2018