"Fundamentals 201: Transfers and Assignments in Franchising," Presentation by David Beyer at the ABA Forum on Franchising 2014 ©2015 Quarles & Brady LLP. This document provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.

2. Fundamentals 201:
Transfers and Assignments in
Franchising
David Beyer
Quarles & Brady LLP
Tampa, Florida
&
Phyllis Alden Truby
Phyllis Alden Truby, APC
Los Angeles, California

3. INTRODUCTION
• Fundamentals:
– Basic principles
– Broad brush
• Basics for
– franchisor counsel drafting Franchise Agreement
– franchisee counsel reviewing transfer and
assignment provisions

4. Summary
• Legal Framework
• Drafting Practices and Franchise Agreement
Provisions
• Some Common Requirements
• Third Party Considerations
• Evaluating and Documenting Transfers

5. LEGAL FRAMEWORK
• To Disclose or Not to Disclose
– Disclosure and Registration
• FTC Rule
–Presale Disclosure
• State Laws
–Presale Disclosure / Registration

6. FTC Rule Legal Framework
“Franchise Seller”
–does not include existing franchisees
selling own outlet
–unless otherwise engaged in franchise
sales

7. FTC Rule Legal Framework
“Sale of a Franchise”
– “any arrangement whereby a person obtains
a franchise from a franchise seller …”
– Does not include transfer by an existing
franchisee if the franchisor has no significant
involvement with the prospect

8. FTC Rule Legal Framework
What is significant involvement?
– Approval / disapproval alone is not
– But these are:
• Imposing new agreement or new
material terms
• Referring potential buyers
• Furnishing financial performance
information

9. State Law Legal Framework
• Similar to FTC Rule
– Exempt sales by franchisees for own account
• Not “by or through” franchisor
– Approval / disapproval not enough

10. State Law Legal Framework
• Some expressly acknowledge exemption
applies
–Reasonable transfer fee
• Some impose restrictions on number:
– Isolated Sale: HI, MI, NY, OR
– MN: 1 Sale / 12 months

11. FDD Transfer Disclosures Legal Framework
Item 6: Other Fees
• Type and Amount
• Due Date and Explanatory
• Payable to Whom
• Refundable
• Uniformity

12. FDD Legal Framework

13. FDD Legal Framework
Item 9: Franchisee’s Obligations
Table cross-references to
• Franchise Agreement
• FDD Items

14. FDD Legal Framework

15. FDD Legal Framework
Item 17 Transfer Disclosures
• Assignment by franchisor
• Definition
• Franchisor approval
• Transfer conditions
• Franchisor right of first refusal

16. FDD Legal Framework

17. FDD Legal Framework

18. FDD Legal Framework

19. FDD Legal Framework
Item 19: Financial Performance Representations
• Actual operating results of outlet for sale
excluded from FPR definition
• Making an FPR is “significant involvement”

20. FDD Legal Framework

21. FDD Legal Framework
Item 20: Outlets and Franchisee Information
• 3 fiscal years of franchise and company
outlet activity
• Franchisees who sold outlet are disclosed
as former franchisees
–Name, city, state, phone number

22. FDD Legal Framework
Table No. 2 – Separate table
• Defined as “acquisition of a controlling
interest in a franchised outlet, during its
term, by a person other than the
franchisor or an affiliate
• Covers private sales of outlet assets and
controlling ownership

23. FDD Legal Framework

24. FDD Legal Framework
Additional disclosure for franchisor sales of
previously franchised outlets:
• Previous owner contact information / 5
years
• Time period for each prior owner
• Reason for change
• Time period controlled by franchisor

25. •
FDD Legal Framework

26. •
FDD Legal Framework

27. State Relationship Laws Legal Framework
10 States Regulate Transfers
• All 10 limit franchisor’s right to restrict
transfers
• Supersede contract terms
• Regulate withholding consent by
franchisor

28. State Relationship Laws Legal Framework
• 4 require franchisees to notify before
Arkansas Nebraska
Iowa New Jersey
• 3 specify 60 days prior and must provide
transferee information
Iowa Nebraska New Jersey

29. State Relationship Laws Legal Framework
• 4 States require franchisor to act reasonably
or in good faith in denying transfer
Hawaii Minnesota
Iowa Washington

30. State Relationship Laws Legal Framework
• 3 States require good cause or a legitimate
business reason:
–Hawaii, Iowa, Michigan
• 2 give examples (Hawaii and Michigan):
–Failure to meet qualifications
–Competitor or doesn’t sign agreements
–Failure to cure defaults

31. State Relationship Laws Legal Framework
• 4 limit franchisor’s disapproval right to
conditions relating to transferee qualifications:
Arkansas Nebraska
Iowa New Jersey
• Character, finances, experience

32. State Relationship Laws Legal Framework
5 States require written notice of denial and
deem approval if not timely
Arkansas (60) Nebraska (60)
Hawaii (30) New Jersey (60)
Iowa (60)

33. State Relationship Laws Legal Framework
• 4 States regulate transfers in context of
succession after death:
California Indiana
Iowa Washington

34. Legal Framework
State Relationship Laws
Iowa (most comprehensive)
• Deemed approval if not rejected in writing in
60 days specifying reasons
• Rejection limited to failure to meet
“reasonable current qualifications … for new
franchisees”

35. Legal Framework
Iowa (cont’d) State Relationship Laws
• Qualifications must be legitimate business
reasons – not arbitrary or capricious
• No discrimination: race, color, national origin,
religion, sex or disability

36. Legal Framework
Iowa (cont’d) State Relationship Laws
Permitted Conditions:
• Completion of reasonable training
• Payment of reasonable transfer fee (reimburse
reasonable and actual expenses)
• Payment of amounts owed

37. Legal Framework
Iowa (cont’d) State Relationship Laws
Prohibited Conditions:
• Entering into a new or different contract
• Transferee undertaking new obligations or
relinquish rights
• Sign release

38. Legal Framework
Iowa (cont’d) State Relationship Laws
Certain transfers automatically approved with no
strings attached:
– Death or disability
– Transfers among existing owners, or spouse or
child, ESOP, but must meet qualifications (50%
or more owner) or controlled companies

39. DRAFTING PRACTICES AND
FRANCHISE AGREEMENT
PROVISIONS
Defining what constitutes a transfer or assignment

40. Drafting Practices: Definitions
Elements of Definitions
• Who
• What
• How

41. Drafting Practices: Definitions
Who: Individual Franchisees
• Single Person
• Married Couples
• Domestic Partners
• De Facto Partnerships

42. Drafting Practices: Definitions
Who: Entity Franchisees
• Trusts
• Corporations
• Professional Corporations
• Limited Partnerships
• LLC’s

43. Drafting Practices: Definitions
Who: Entity Franchisees
Some issues:
• Thresholds
• Among owners

44. Drafting Practices: Definitions
What is Transferred
• Franchise Agreement only
• Premises lease
• Furniture, fixtures, equipment

45. Drafting Practices: Definitions
What is Transferred
Entity Interests
• Corporations
– Voting Stock
– Nonvoting Stock

46. Drafting Practices: Definitions
What is Transferred
Entity Interests
• LLC’s
– Entire Membership
– Economic Interest Only

47. Drafting Practices: Definitions
What is Transferred
Entity Interests
• Partnerships
– General
– Limited

48. Drafting Practices: Definitions
What is Transferred
Entity Interests
• Family Trusts

49. Drafting Practices: Definitions
Flexibility and Consistency
• Wide range of circumstances
• Wide range of transferees

50. Drafting Practices: Definitions
Flexibility and Consistency
Some Examples:
• Among existing owners
• Among or to family members
• To third parties
– Investors
– Operational personnel

51. Drafting Practices: Standards
Some Common Standards for Consent
1. Complete Discretion
2. Not Unreasonably Withhold
3. Comparably Qualified

52. Drafting Practices: Standards
Some Common Standards for Consent:
Complete Discretion
• Why
• Why not
– Franchisee perception

53. Drafting Practices: Standards
Some Common Standards for Consent:
Not Unreasonably Withhold
• A good compromise
• What does it mean
– Commercially reasonable?
• Why not
– Franchisee perception

54. Drafting Practices: Standards
Some Common Standards for Consent:
Comparably Qualified
• Taking the measure of the current franchisee
• Then or now

55. SOME COMMON
REQUIREMENTS AND
CONSIDERATIONS

56. Pay Transfer Fee
• Is it a profit center?
• Purpose dictates amount
• Exceptional events
Requirements

57. Execute Current Form of
Franchise Agreement
• Franchisee’s perspective
• Franchisor’s perspective
• Are there exceptions?
Requirements

58. Continued Right to Occupy
Requirements

59. Review and Approval of Sale or Other
Transfer Documents
• Purpose
– Cash Flow
– All assets
– Assumption
• Risks
Requirements

60. Payment of All Sums Due at Time
of Transfer
• Audit
• Closing condition?
– Immediate payment
– Assumption by buyer
Requirements

61. Franchisee Not in Default
• When requested
• During sale process
• Upon closing
• Buyer curing default at close
Requirements

62. Requirements
Renovating, Remodeling, and
Upgrading Franchise Location
• Franchisee’s view
• Franchisor’s view
• Compromise?

63. Requirements
New Owner’s Successful Training
• Timing
• Cost
• Effect of Failure

64. Requirements
Assignor’s Secondary Liability
• Franchisee’s view
• Franchisor’s view
• Compromises

65. Release
• Franchisor’s view
• Franchisee’s view
• Mutuality
• Effect of state laws
Requirements

66. Not to Competitor
• Defining competitor
• Effect
Requirements

67. THIRD PARTY CONSIDERATIONS

68. Third Party Considerations
Landlords
• Consent considerations
• Lease Addendum
• Timing issues

69. Third Party Considerations
Lenders
• Franchisee’s counsel: review loan
documents
• Request consent early and often

70. EVALUATING AND PAPERING
THE TRANSFER PROCESS

71. Evaluating and Papering the Transfer Process
• Observe any applicable state relationship
laws
• Implied covenant of good faith and fair
dealing

72. Evaluating and Papering the Transfer Process
• Generally, franchisor transfer decisions
exercised in good faith will be respected
• Franchisor’s legitimate business reasons
for refusing transfers will be upheld
But, lack of good faith or reasonable
business justification may overturn a
franchisor refusal

73. Evaluating and Papering the Transfer Process
• Prepare and utilize transfer checklist
• Always obtain a franchise application
• Test transferee against qualifications for
new franchisees
• If disapproved, specify all material
reasons

74. Evaluating and Papering the Transfer Process
Assignment and Assumption Agreement
should specify any terms and conditions:
• Release
• Transfer fee
• Ancillary agreements
• Cure of defaults or payments due

75. Evaluating and Papering the Transfer Process
Assignment and Assumption Agreement
should specify any terms and conditions
(cont’d):
• Exclude post-term obligations to still
bind seller
• Waive right of first refusal
• Follow-up with any third-party
documents that may also affect
franchisor in the transfer

76. End
©2014 Quarles & Brady LLP. This document provides information of a general nature. None of the information contained
herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and
information or future developments may affect the subjects addressed in this document. You should consult with a lawyer
about your particular circumstances before acting on any of this information because it may not be applicable to you or your
situation.