While franchisees’ transfer rights are usually subject to numerous conditions, franchisors typically reserve broad rights to sell the system. Franchisors do not need their franchisees’ consent to sell, and they are not required to cure outstanding defaults or consider the potential impact on franchisees when they seek to court the highest bidder. As a result, sales of successful franchise systems are common, with typical buyers including competing brands as well as private equity companies seeking to add assets to their portfolios.
Earlier this year, Red Lion Hotels Corporation agreed to buy the Knights Inn franchise system from Wyndham Worldwide for $27 million. BrightStar Care also recently acquired the regional chain, HomeChoice Senior Care, for an undisclosed sum. While the consequences of these types of sales can vary, some of the potential implications for franchisees include the following:
1. Limited Options for Challenging the Sale
Generally speaking, franchisees’ options for legally challenging the sale of a franchise system are limited. Franchise agreements almost universally include provisions acknowledging the franchisor’s right to sell; and, even though these provisions are extraordinarily one-sided, they will typically be enforced by the courts. It is standard for proposed sales and the terms of franchise system acquisitions to be kept confidential, so the “surprise” of learning that you will have a new franchisor is generally not sufficient grounds to pursue a claim for bad faith or fraud. There may be exceptions in limited circumstances (for example, if you recently purchased your franchise and specifically relied on representations that the franchisor’s ownership would not change). But, in most cases, franchisees will be forced to accept that their franchise system is under new ownership.
2. Branding Changes
In most cases, the franchisor’s brand recognition is one of the primary drivers of the value of a franchise system acquisition. As a result, franchisees are typically able to continue operating under their existing brand, even when the system is purchased by a competitor. This appears to be the case with the Knights Inn sale, with Blue MauMau reporting that Red Lion is in the process of, “buying and expanding a lineup of brands in the economy segment.”
But, with the sale of the franchise system, rebranding is always a possibility, and a typical franchisor-friendly franchise agreement will require franchisees to adopt new trademarks and trade dress at their own expense. For some franchisees, this can be prohibitively expensive, and it may or may not serve to enhance their competitive position.
3. System Updates and Integration
More common than rebranding is a requirement to update to new systems and integrate with the new owner’s technology infrastructure. This, too, must typically be done at the franchisees’ expense, and it must be done regardless of whether the changes are beneficial at the owner-operator level.
4. Termination Following Sale
If you are not happy with the franchise system’s new ownership, or if you cannot afford to rebrand or adopt new systems, can you terminate as the result of a franchise system sale? Generally, no. Franchisors know that franchisee dissatisfaction upon sale is a risk; and, to ensure buyers that they will not experience a mass exodus, they will usually expressly limit their franchisees’ rights of termination.
Questions? Contact Goldstein Law Firm for a Free Consultation
Do you have questions about your rights as a franchisee? If so, you can contact the Goldstein Law Firm for a free, no-obligation consultation. To speak with 30-year franchise lawyer Jeffrey M. Goldstein in confidence, please call (202) 293-3947 or tell us about your situation online today.
