How is the purchase price determined for Ella Cafe's call option on membership interests?
Ella_Cafe Franchise · 2024 FDDAnswer from 2024 FDD Document
The purchase price of the Membership Interests pursuant to this Call Option ("Call Option Purchase Price") shall be determined based upon a 3.0 multiplier of the Company's trailing twelve (12) month Earnings Before Interest Tax Depreciation and Amortization ("EBITDA").
For the avoidance of doubt, the Call Option purchase price shall be determined based upon the Company's EBITDA for the twelve months immediately preceding the date to which FRANCHISOR elects to exercise its Call Option then multiplied by three.
EBITDA for any monthly or yearly period shall be determined based upon the Company's books on a cash basis for the applicable period.
Notwithstanding anything to the contrary, if Call Option is exercised within five years from the Effective Date of this Agreement, the Purchase Price shall not be less than the original investment by the Franchisee minus 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. At the closing of any Call Option, FRANCHISEE or other Company Member shall represent and warrant that he i) has full right, title, and interest in and to the Membership Interests being purchased; ii) that he has full power and authority and has taken all necessary action to sell such Membership interests; and iii) that his Membership Interests are free and clear of any and all liens other those arising as a result of this Agreement. FRANCHISOR and or his authorized designee shall pay the Call Option Purchase Price for the Membership Interests being purchased by certified or official bank check or by wire transfer of immediately available funds.
Source: Item 22 — CONTRACTS (FDD page 50)
What This Means (2024 FDD)
According to Ella Cafe's 2024 Franchise Disclosure Document, the purchase price for the membership interests under the call option is calculated using a multiplier of 3.0 applied to the company's trailing twelve-month Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). This EBITDA is based on the company's cash-basis books for the twelve months leading up to the date Ella Cafe chooses to exercise its call option.
However, there's a stipulation: if Ella Cafe exercises the call option within five years from the agreement's effective date, the purchase price cannot be less than the franchisee's original investment, minus standard depreciation as per GAAP accounting standards. This clause protects the franchisee's initial investment during the early years of the franchise agreement.
When Ella Cafe decides to exercise its call option, it must provide written notice to the franchisee, specifying the amount of membership interests to be purchased, the payment method, and the proposed purchase price based on the EBITDA multiplier. The franchisee then has 30 days to contest the proposed purchase price. Failure to contest within this period is considered an irrevocable acceptance of the price. The franchisee has the option to hire an independent certified public accountant to inspect the company's books to confirm the EBITDA valuation, and Ella Cafe can do the same if they disagree with the franchisee's valuation. If the valuations differ, the call option purchase price will be the average of the two independent EBITDA valuations, which will be binding on both parties.
The closing of the call option must occur no later than 90 days after the franchisee receives the call option notice. At closing, the franchisee must guarantee their right, title, and interest in the membership interests, their authority to sell, and that the interests are free of liens. Ella Cafe will pay the purchase price via certified or official bank check or wire transfer.