Has it ever occurred to you that you don’t actually own your network of Dunkin’ Donuts restaurants? Well, let me clarify that proposition…while you most likely own the assets, such as the coffee pots, menu boards, and Radiant systems, you do not have the unfettered ability to sell your business. Even if you and your family have invested years of hard work and taken on millions of dollars of liabilities to grow your network, your ability to sell your business and realize a meaningful return on your investment is restricted by the terms of your franchise agreement.
The Dunkin’ Donuts franchise agreement prohibits the transfer of your restaurants without the consent of the Brand, which, the language states, cannot unreasonably be withheld. When a franchise owner submits a complete transfer package for evaluation, the Brand must consider whether to approve, reject, or exercise its right of first refusal (the “ROFR”).
Dunkin’ may consider a wide array of variables when determining whether to approve or reject a proposed transfer. These include the prospective buyer’s QSR experience and financial wherewithal, the overall economics of the deal – including the actual purchase price and the values allocated to each restaurant – plus Dunkin’s rigorous, break-even analysis. Any purchase agreement must also comply with the provisions of the franchise agreement and Rider to Contract for Sale (the “Rider”).
When you consider the Brand may use any or all of the above criteria as a “reasonable” basis to reject a proposed transfer, it’s pretty clear there is an imbalance of power. What’s more, much of the above criteria is subjective, which fosters inconsistency in the transfer approval process.
From our experience, the imbalance of power coupled with the incontinency of the process can often stand in the way of a franchisee’s wish to sell his network. What is more startling, however, are the lengths to which the Brand will go to ensure the terms of your purchase agreement do not interfere with its ability to exercise the ROFR.
Depending on which version of the franchise agreement is being transferred, Dunkin’ Brands will have 45 or 60 days from the date it receives a complete submission package to determine whether it will assume the purchase agreement and close on the transaction itself, or assign the purchase agreement to a third-party assignee.
In recent years, the Brand’s ruling on a transfer has become increasingly focused on whether the terms of the deal impede its ability to exercise its ROFR. The Brand will reject those terms and conditions in the agreement which would be beneficial to the franchisee, and could deter a third-party from making the purchase.
By doing this, one could argue Dunkin’ is not only acting in bad faith, it is also marginalizing the franchisee’s ability to exit the system and realize a profit on his investment. It speaks to the imbalance of power that, at the very moment the franchisee is ready to cash in the equity he’s earned, Dunkin’ is able to manipulate the market to its own benefit. In legal terms, Dunkin’ is rendering all but meaningless the basic tenants of “willing buyer, willing seller” and “freedom of contract.”
From our experience with the transfer of hundreds of Dunkin’ restaurants over the past few years, we have created this short list of current issues and new rules that impact how Dunkin’ franchisees may sell their networks and maximize their return on investment:
1. Development Rights:
Under the current terms of the Rider, you cannot transfer a site selection approval or a site that is under construction, unless such site has been issued a franchise agreement (i.e. a PC number alone is not enough).
2. Purchase Price Allocation:
Schedule 2.10 of the Rider will reflect the manner in which the aggregate transaction purchase price of the transaction is allocated to each restaurant.
a. Generally speaking, restaurants that have been open for less than a full year can only be allocated a value equal to the capital expenditures outlaid in developing the location.
b. Restaurants that are under construction at the time of submission (but have a franchise agreement) can only be allocated a value equal to the verifiable capital expenditures made through the date of submission.
3. Transfer Fees:
The vast majority of Dunkin’ purchase agreements we have seen included a provision that transfer fees are to be split evenly between the parties. Just recently, certain business development managers have taken the position that the transfer fees are solely the obligation of the Seller and cannot be split.
Often, parties will negotiate to have the Seller cure all deficiencies and the Buyer pay the associated cost. Recently, Dunkin’ has taken the position that such open-ended financial obligations frustrate their ability to exercise the ROFR. We have been able to address this issue by capping Buyer’s contribution to such costs at a fixed amount.
Frequently, a buyer will only be interested in acquiring a network if the transaction includes development rights. If you are going to condition your transfer on the buyer receiving a new SDA, be aware that the Brand has no obligation to issue a new SDA. As such, be sure to draft your provision accordingly by making the request subject to franchisor consent.
6. Franchise Term:
Insufficient franchise term (less than 10 years) remaining on a given franchise agreement will adversely impact your break-even analysis and affect your purchase price allocation for the Rider. As with the SDA above, the franchisor has no obligation to sell either party additional franchise term, so be sure to draft your provision accordingly by making the request subject to franchisor consent.
While this covers many of the issues and obstacles franchisees may face, there are certainly others which can frustrate the transfer process and interfere with a franchise owners’ ability to sell his or her businesses. We’d love to hear from you if you have others the franchisee community should read about.
David S. Paris is a founding partner of Paris Ackerman LLP, a transactional law firm specializing in franchising, licensing and distribution, and commercial real estate. He will be speaking at the upcoming DDIFO National Conference, and can be reached at firstname.lastname@example.org.