By Eric H. Karp, Esq., General Counsel To NCASEF
In the last issue of Avanti, we explored the turnover rates of franchised stores, which includes terminations of franchise agreements, non-renewals, repurchases by the franchisor, and abandonments of stores by franchisees. That examination did not include transfers in the calculation of turnover rates. In an excellent companion article in this issue, my colleague, Thomas Ayres, walks through the process of surrendering a franchised store.
Transfers are sales of franchised locations from one franchisee to another franchisee. These transactions can be the result of distress or bad news, such as the death or incapacity of a franchisee, or good news in that a franchisee has reached the stage where he or she wants to retire or engage in other activities. Transfers sometimes occur when 7-Eleven gives a franchisee who has received a termination notice time to attempt to sell the location rather than having it terminated. (Termination notices can often be avoided by curing a default and staying in compliance with the franchise agreement and its operating standards.) Nevertheless, when such a sale is concluded, it is treated as a transfer rather than as a termination.
The number of transfers in the 7-Eleven system has been trending upward. Over the last five complete years, which included the introduction of the so-called 2018 Franchise Agreement and the COVID-19 pandemic, there were a total of 1,170 transfers in the United States. In the previous 5 years, from 2013 to 2017, there were 612 transfers, or approximately one-half of the number from 2018 to 2022.
The definition of a “transfer” and the requirements for transfers are summarized in Item 17 of the Franchise Disclosure Document (“FDD”) and in sections 25(b) and 25 (c) of the 2018 form of the Franchise Agreement.
As a threshold matter, a “transfer” includes not only a sale or assignment of the Franchise Agreement and your interest in the franchised location, but also a transfer of any of the shares of stock in a corporation that may hold the Franchise Agreement, and also any transfer of the membership interests in a limited liability company. In addition, because the franchisee does not own an interest in the furniture, fixtures or equipment, these may not be sold without SEI consent.
Under the Franchise Agreement the person or entity to whom the franchisee sells or proposes to sell his or her location is called a “transferee”—in common parlance, the buyer.
That said, here is a checklist of the eight steps that SEI may require in the event of an assignment:
- Release of Claims by Transferee. The transferee or buyer is required to execute a document that releases SEI from any liability for amounts paid by the transferee or any representations you may make to the transferee regarding the business. While SEI takes an active role in approving both the transferee and the transaction, it insulates itself from any liability to you or the buyer.
- List of Available Stores. In a provision unique to the 7-Eleven system, SEI reserves the right to provide the proposed transferee with a list of all 7-Eleven stores available to purchase in the general area where your store is located. This provision obviously helps the transferee in a variety of ways, but it is not particularly favorable to the franchisee seeking a sale.
- Release of Claims. In order to finalize the transaction, the franchisee must enter into (a) a mutual agreement with SEI to terminate the existing Franchise Agreement, (b) an indemnity in favor of SEI for any claims made by the transferee relating to the transaction, and (c) a general release by you in favor of SEI, which has the effect of wiping out and forever forgiving any claims you may have against your franchisor.
- Franchise Agreement in Effect. In order to be eligible to participate in a sale of your store, no termination of your Franchise Agreement can be pending, and you must be not in Material Breach of the Franchise Agreement. Material Breach is a defined term under Exhibit E to the Franchise Agreement, which in turn refers to 12 separate and distinct events listed in section 26(a) and 16 events listed in section 26(b) of the Franchise Agreement.
- Complete Required Training. SEI is required to approve or disapprove your proposed transferee for training within 60 days after it receives all information regarding the proposed transaction that it may reasonably require. The reasonably required information is not specified in the Franchise Agreement. Training must be successfully completed based on criteria and standards specified by SEI.
- Sign Then-Current Form of Franchise Agreement. The transferee must sign the then-current form of Franchise Agreement which may be materially different (and possibly less favorable to your buyer) than your Franchise Agreement at the time of sale. The transferee must also comply with all then-current financial terms, including those relating to the Down Payment, the 7-Eleven Charge, Franchise Fee, and other matters. These capitalized terms are also defined in Exhibit E to the Franchise Agreement.
- Meet All Qualifications. The transferee must, in the sole opinion of SEI, meet all qualifications to become a franchisee including those general qualifications set forth in the then-current 7-Eleven Operations Manual. According to the 2023 FDD, the Operations Manual contains 1,009 pages. Provisions regarding the Operations Manual can be found in Section 4 of the 2018 form of Franchise Agreement.
- Comply with SEI Right of First Refusal. SEI has a right of first refusal, meaning that it has an opportunity to match any offer you may receive from anyone else to purchase your franchised business. You must notify SEI of any such offer you receive and provide whatever information and documentation regarding that offer that it may require. Once that information is submitted, SEI has 15 days to exercise its right of first refusal, in which event it must close the purchase within 60 days thereafter. It is important to note that such rights of first refusal are more or less standard in franchise agreements in the United States.
One way to measure the health of a franchise system is the extent to which franchisees are able to successfully navigate the many requirements for approval of the sale of their business, as well as their ability to harvest the goodwill value that they have created through their investment and hard work. We hope that this information is helpful to every franchisee in the system, especially those who are currently contemplating the possibility of a transfer.