If Burros Fries exercises its right of first refusal, what is the franchisee obligated to do?
Burros_Fries Franchise · 2024 FDDAnswer from 2024 FDD Document
In the event of any such Loss, we, at our option, may: (a) if the Loss has not materially impaired the Business (in our reasonable Business Judgment), require that the Franchisee, upon our demand, place the Business in good condition and repair reasonably satisfactory to us as mentioned above; or (b) if the Loss has materially impaired the Business and it is substantially destroyed, (in our sole judgment), we may require the Franchisee to repair the existing Business or find an alternative location within the Territory within ninety (90) days or soonest possible timeframe according to Franchisee's lease. We may extend this period an additional thirty (30) days at our discretion and failure of Franchisee to comply may result in termination of this Agreement. Upon termination, the Franchisee must return to us the System (including
all materials), and we have the first right of refusal to purchase all Assets (as described in Section 24.G), but any such purchase price will be reduced to account for the Loss the Franchisee incurred.
Source: Item 22 — CONTRACTS (FDD page 53)
What This Means (2024 FDD)
Based on the 2024 Burros Fries Franchise Disclosure Document, in the event of a loss that materially impairs the business, Burros Fries has the first right of refusal to purchase all assets. If Burros Fries exercises this right, the purchase price will be reduced to account for the loss the franchisee incurred. This clause is triggered if the business suffers damage, loss, theft, destruction, or requisition by a governmental entity, or eminent domain.
This means that if a Burros Fries franchise location experiences a significant loss, such as a fire or natural disaster, that substantially damages the business, the franchisor has the option to buy the remaining assets from the franchisee. The price Burros Fries pays for these assets will be adjusted to reflect the financial loss the franchisee has already experienced due to the event.
For a prospective franchisee, this represents both a risk and a potential benefit. The risk is that a major loss could lead to the franchisor taking over the business. The benefit is that the franchisee would receive some compensation for the assets, even in a distressed situation, potentially mitigating some of the financial impact of the loss. It is important for franchisees to understand the conditions under which this clause is activated and how the asset valuation would be determined.