Legal Blog

Franchise Facts: Expanding Your Franchise: Part 3 – Rights of First Refusal

Click here to read Part 1 and Part 2

As a franchise attorney, I see franchisees with many different goals. Some franchisees are happy with one store, while others are intent on building an empire. There is no right or wrong way to participate in the franchise world. However, choosing the right vehicle for expansion is important, and there are several vehicles to choose from. In Part 1 and Part 2, I discussed the pros and cons of area development agreements and options. This week, I will address what are known as “rights of first refusal.”

 

Rights of First Refusal

Over the years, I have had many clients ask me about rights of first refusal. However, these rights and their benefits are often misunderstood.

When a franchise obtains a right of first refusal, that right permits the franchisee to step into the shoes of another potential franchisee prospect. If the prospect is seeking to open a territory in the franchisee’s backyard, the franchisee can protect itself. As a result, the right of first refusal can be a useful tool for franchisees to keep other franchisees out of their local markets.

However, rights of first refusal are problematic. For one thing, the existing franchisee has no way to control the timing of when prospects will appear. A new franchisee with a right of first refusal could be faced with an opportunity immediately, even though the franchisee may not be ready to open a second location (and may be struggling with the first). If the franchisee does not exercise the right, the franchisee risks having another franchise in his anticipated market.

Furthermore, a franchisee with the right of first refusal often has no way of knowing whether or not the prospect is truly interested in opening up a new franchise. If a prospect submits an application to the franchisor, does this constitute an event significant to trigger the right of first refusal? Is more required of the prospect, such as the payment of a franchise fee, attendance at discovery day, or the execution of a franchise agreement? Determining whether a prospect is a bona fide contender for a franchise is not easy, and the triggers for setting a right of first refusal in motion must be carefully anticipated, discussed and drafted to prevent abuse.

Otherwise, a franchisee could prematurely open a new franchise.

 

If you have any questions about franchise law, please contact Brian Loffredo at bloffredo@offitkurman.com.

 

ABOUT BRIAN LOFFREDO

bloffredo@offitkurman.com | 301.575.0345

Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.

In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.

Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.

 

 

 

ABOUT OFFIT KURMAN

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