Q: My agency is a member of a franchise or consortium organization. The organization recently reminded me that, in our contract, it has a right of first refusal in case we want to sell our agency to any potential buyer. What exactly is a right of first refusal? Is there any way such a contract provision can benefit me?
A: In my experience, a franchiser or consortium's right of first refusal is almost always a problem for an agency owner who wants to sell. While innocent sounding, such a clause does nothing but delay and frustrate buyers and sellers, adding needless complication to the acquisition process.
I have recently advised several agencies that had found potential buyers, where the sellers belonged to an organization that has a right of first refusal. The term means that if the agency receives a definite offer from a buyer, the agency must communicate the details of the offer to the organization, which then has 15 or 30 days to decide whether to buy the agency for the same price and on the same terms as in the offer.
The first problem is that potential buyers invariably want to avoid having to disclose the price and terms to a third party that is under no obligation to the potential buyer to keep the deal confidential. Therefore, buyers insist that the potential seller be as vague as possible, which in turn makes the organization want more details before the 15- or 30-day period even begins to run.
The second problem is that, once the franchiser or consortium has received sufficient information, it usually takes the full 15- or 30-day period to make up its mind. Inevitably, the answer is that it will not exercise its right to match the offer and buy the agency, but the delay and uncertainty create frustration.
The third, most vexing problem is that, once the organization declines to buy, it insists that the potential seller leave the organization immediately if the buyer is part of a competing business or group, which is often the case.
If the sale goes through before the seller leaves, the franchiser or consortium will claim that the seller is in breach of its agreement, forcing the seller to pay damages to the organization in order to proceed on the schedule that the buyer and seller have chosen.
From the seller's viewpoint, these potential problems mean that the organization's right of first refusal is nothing more than a roadblock in the way of selling when and how you want. If travel franchisers or consortiums actually exercised their rights of first refusal, such a clause might benefit you by having a more financially secure buyer, but experience shows that such purchases do not take place.
If, as part of any renegotiation, you can get the franchiser or consortium to agree to delete the clause giving it the right of first refusal, you would be well advised to do so.
If you cannot eliminate it, try to find a loophole allowing you to sell your agency without going through the notice and disclosure requirements of the contract clause, as not all rights of first refusal cover all the structures by which your agency can be acquired.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].