Right of First Refusal

Franchisors often give themselves the right to purchase a franchise when franchisees want to sell. Franchisor attorneys put Right of First Refusal clauses into franchise agreements to provide control over what sort of franchisee can join a franchise network. But a strong criticism of the practice is that franchisors use such clauses as carte blanche to convert prime and proven franchise locations into their own lucrative company-owned properties.

If a franchisor has a right of first refusal, no matter how good the prospect that an exiting franchisee introduces, the franchisor can refuse to let the property be sold to the prospect, claiming the prospect isn't worthy enough. The franchisor can then purchase the property itself for cents on the dollar, thus greatly impacting a franchise owner's return on investment.

In the rare case where a franchise owner negotiates to insert its right of first refusal in the franchise agreement, the franchisee is put in the driver's seat to refuse anyone that the franchisor introduces to buy the property, including itself. In other words, the franchisee controls who buys his or her franchise.

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Related Reading:

First Right of Refusal, DC Strategy