Can an Ella Cafe franchisee contest the adequacy of consideration for the Call Option Purchase Price?
Ella_Cafe Franchise · 2024 FDDAnswer from 2024 FDD Document
s standard depreciation in accordance with GAAP standards of accounting.
- (b) if FRANCHISOR desires to exercise its Call Option right to purchase all or part of FRANCHISEE or any other Company Member's Membership Interests pursuant to this Section, then FRANCHISOR or his authorized designee shall provide written notice to FRANCHISEE or any other Company Member specifying the amount of Membership Interests being purchased, the method of payment, as well the proposed purchase price based upon the 3.0 multiplier of the Company's trailing 12 month EBITDA ("Call Option Notice"). Upon receipt of the Call Option Notice, FRANCHISEE or any other Company Member shall have 30 days to contest the proposed purchase price. Failure to send written notice contesting the proposed purchase price within 30 days of receipt of the Call Option Notice shall be deemed an irrevocable acceptance of the Call Option purchase price. FRANCHISEE or any other Company Member may, at FRANCHISEE's
or the other Company Member's sole cost and expense, retain an independent certified public accountant to inspect the Company's books and records for the previous 12 months for purposes of confirming the EBITDA valuation for Membership Interests solely for purposes of effectuating the irrevocable Call Option. Such evaluation must be conducted within 45 days of FRANCHISEE or other Company Member's receipt of the Call Option Notice. In the event FRANCHISOR disagrees with FRANCHISEE's or other Company Member's EBITDA valuation, FRANCHISOR may, at its's sole cost and expense, retain an independent certified public accountant to inspect the Company's books and records for the previous 12 months. In the event Franchisor' and FRANCHISEE or other Company Member's valuations differ, the Call Option Purchase price will be the average of the parties' respective independent EBITDA valuations and shall be binding upon each of the Parties.
- (c) the Closing of the Call Option shall take place no later than 90 days after FRANCHISEE or other Company Member's receipt of the Call Option Notice.
Source: Item 22 — CONTRACTS (FDD page 50)
What This Means (2024 FDD)
According to Ella Cafe's 2024 Franchise Disclosure Document, a franchisee initially has the right to contest the proposed purchase price of their membership interests if Ella Cafe's franchisor elects to exercise its call option. Upon receiving a Call Option Notice, the franchisee has 30 days to contest the proposed purchase price by sending written notice. Failure to contest within this timeframe is deemed an irrevocable acceptance of the purchase price.
The Ella Cafe franchisee can retain an independent certified public accountant at their own expense to inspect the company's books and records for the previous 12 months to confirm the EBITDA valuation. This evaluation must occur within 45 days of receiving the Call Option Notice. If the franchisor disagrees with the franchisee's valuation, they may also retain their own independent certified public accountant to inspect the books.
However, the FDD stipulates that the franchisee knowingly and voluntarily agrees to the sufficiency of consideration and the adequacy of the Call Option Purchase Price valuation. By agreeing to these terms, the franchisee irrevocably waives any right to contest the adequacy of consideration in law or equity, and this waiver is perpetual. This clause appears to contradict the earlier allowance to contest the purchase price, as it ultimately nullifies the franchisee's ability to legally challenge the valuation, regardless of any discrepancies found during the independent audit. Prospective franchisees should seek legal counsel to fully understand the implications of this waiver and the enforceability of the call option terms.
This type of clause is not uncommon in franchise agreements, where franchisors seek to protect their interests and maintain control over the franchise system. However, the inclusion of both a limited right to contest and a perpetual waiver creates ambiguity and potential legal risk for the franchisee. It is crucial for potential Ella Cafe franchisees to carefully review these provisions and understand the extent to which they can challenge the franchisor's valuation of their membership interests.