When is Franchise Transferee Bond?

One of the inalienable rights to owning your own business is the ability to transfer and sell your business. The sale and transfer of a business can be tenuous with many moving parts.  In the franchise world, this already tenuous transaction is further complicated.  Once a franchise seller and prospective franchisee buyer come to deal, the franchisor must approve the sale.

When approving the prospective franchise buyer, the franchisor will review the sales agreement, vet the prospective franchisee buyer, and set stipulations to the sale.  Common stipulations, among other things, includes payment of a transfer fee and payment any outstanding debt.

In some extenuating situations, there may be an urgency to the transaction because of health or family issue, finances of the franchisee, and other general life issues.  The formalities and the work-through of the sales process can be arduous.  However, the push to forgo the formalities and work-throughs should be thwarted.  Failure to do so may yield an inability to protect the franchise business and the franchise brand.

Hence the case of Rocky Mountain Chocolate Factory v. Timothy Arellano et al.  Franchisee and a buyer, defendant Arellano entered into protracted sales negotiations.  A sale agreement was sent to the franchisor, Rocky Mountain Chocolate Factory [RMCF].  Franchisor RMCF approved the franchise transfer pursuant prerequisite conditions, including among other things, the payment of delinquent amounts owed totaling $25,000.  The prospective franchisee buyer took over the operation of the franchise prior to the sale of the franchise being perfected or franchisor giving approval. Franchisor RMCF accepted and filled orders for inventory from the prospective franchisee buyer, Arellano, that had taken over the store.

The sale negotiations broke down.  No one wanted to pay the delinquent $25,000 owed to the franchisor.  Franchisor terminated the franchise agreement for failure to pay the $25,000.  But, by this time the prospective buyer and defendant Arellano has taken over the franchise business.  Despite the termination, Arellano refused to cease business operations or de-brand the business.  Franchisor sued Arellano in the franchisor’s home state of Colorado.  It was a dead stop, brick wall.  Franchisor does not have personal jurisdiction over Arellano because Arellano never signed the franchise agreement or anything else.

Hoping nothing goes wrong and bending does not always work out for the best.  When working through a transfer process, it is important to follow procedures carefully.  There are lots that can go wrong and remember until the buyer signs on the dotted line; there is not much that can be enforced.

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