Negotiating Key Provisions in the Agreement

AuthorDawn Newton, Rebekah Prince, and Les Wharton
In many ways, the written agreements for a transaction involving
franchise systems are very similar to the agreements for any other trans
action involving the buying or selling of a company. As outlined below,
the agreements that memorialize the deal from the opening of negotia‑
tions to the nal execution of the formal agreement typically have the
same structure and general components found in any other deal. How‑
ever, the franchise context presents some unique considerations and
negotiation terms, which are discussed in this chapter.
As in other parts of this book, this chapter focuses more on the specic
concerns raised by the franchise context than on the general guidelines
for completing a deal. Many other resources provide more detailed guid
ance on drafting and negotiating nondisclosure agreements, letters of
intent, asset purchase agreements, stock purchase agreements, and
related documentation.1
1. See generally, A.B.A. c
, m
chAse Agreement With commentAry Part 3 (2001) [hereinafter model Agreement]; A.B.A.
& A
, m
(2d ed. 2010); A.B.A. c
, t
m & A p
: A
prActicAl guide For the Business lAWyer (Gary A. Munneke & Anthony E. Davis eds.
2005); A.B.A. section oF Antitrust lAW, A primer on the lAW oF mergers And Acquisi-
tions (2003).
Negotiating Key Provisions
in the Agreement
Dawn Newton, Rebekah Prince, and Les Wharton
Vines_Mergers_20140521_13-42 FINAL.indd 41 6/3/14 1:26 PM
The rst agreement between the parties and any brokers or other relevant third‑
parties is typically a nondisclosure and condentiality agreement (NDA). Although
informal discussions often begin before an NDA is signed, the best practice is to
put the NDA in place before any condential information is exchanged. Where the
NDA is executed after the start of discussions, it should be drafted to apply to all
prior discussions, and any disclosing party should require information regarding
the uses that a receiving party has already made of its condential information.
For the purposes of crafting the NDA, the distinction between the buyer and
the seller is often blurred. In many deals, one franchise system acquires another
system, and during the course of negotiations substantial condential information
is exchanged about both systems in order for the parties to mutually evaluate
whether or not the proposed deal is a good t based on culture, brand values,
geographic brand popularity, and other intangible factors. Owners who are system
founders tend to have an emotional connection to the businesses they have built
and want assurances that it is being passed to competent management that will
ensure that the concept thrives. It is not uncommon for such a seller to request
detailed information about the acquiring brand and its marketing and franchi
see operational support. Where the deal is structured to include earn‑outs, the
seller will want to conduct reasonable inquiries into the buyer’s business plans
and practices in order to evaluate the likelihood that the buyer will be successful
and the future revenue stream is relatively secure. Accordingly, the NDA should
state that all information exchanged is condential and that the receiving party
will not use this information to its competitive advantage if the acquisition fails.
As a result, the NDA that is appropriate for a deal between two existing franchise
systems may be far more mutual than that required where a venture capitalist
adds a franchise system to its portfolio. Within this section, we abandon the use
of the terms buyer and seller in order to focus on issues that are of concern to
any franchisor faced with the prospect of discussing its internal business mat
ters. In deals where each party is likely to be both a disclosing and a receiving
party, the NDA’s protections should be mutual.
In addition to protecting the condentiality of information that may be dis
closed by all parties to the initial discussions, this agreement is crucial to ensure
that third‑party franchisees within the system are not alerted to the possibility
of a change in ownership, management, or brands before the parties are ready
to make that disclosure. Particularly in younger or less established franchise
systems, many of the franchisees may lack a high degree of business sophisti
cation and can be more likely to react negatively to the prospect of a merger or
Mergers & Acquisitions of Franchise Companies, Second Edition42
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acquisition, because of a fear of the unknown and because they may feel threat‑
ened by a new owner who might, for example, be more aggressive about enforcing
breaches of the franchise agreement or who might have a less paternalistic feel‑
ing towards its franchisees.
A. Confidential Information
From the franchisor’s perspective, the denition of “condential information” in
the NDA should be broad and it is common for provisions to reference a wide
range of intellectual property owned by the franchisor. The intellectual property
will typically include trademarks (both registered and unregistered), copyrighted
material (including operations manuals and internal guidelines that are often
unregistered, occasionally patented technology) the system’s future develop
ment plans, organizational infrastructure, methods of franchisee support and
assistance, current and future marketing plans, nances, and any potential or
actual disclosure or regulatory violations, in addition to a catch‑all description
of the assets that create the franchise “system,” including the know‑how, ideas,
and techniques of the franchise.
“Condential information” should also cover information specically pertaining
to franchisees, including information about their revenues, communications with
the franchisor, marketing plans, operational history, volume of defaults and com
plaints, and other business information. Some of this information will have been
disclosed to the franchisor by the franchisee, such as the franchisee’s nancial
records and nancial qualications for acquiring the franchise, while other parts
were accumulated independently by the franchisor through its periodic reviews
or inspections. The franchisor may owe its franchisees a duty of condentiality
in its own disclosure of these materials, under the terms of the franchise agree‑
ment, or it may feel obligated to protect some material simply by the nature of
the trust inherent in the franchisor/franchisee relationship.
Although earnings information provided to the prospective purchaser of a
franchise system would not be considered to be a nancial performance rep
resentation, maintaining the condentiality of any information that does not
otherwise comply with the requirements of Item 19 is particularly important. The
seller should ensure that earnings information remains condential and does not
somehow end up in the hands of a prospective franchisee. If it does, it could be
viewed as an unlawful nancial performance representation.
During the course of due diligence, an acquiring party may also have access
to information about the system’s customers, including nancial information and
personally identiable information. Not only may the franchisor have concerns
about the impact on its goodwill if the acquiring party uses this information,
43Negotiating Key Provisions in the Agreement
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