FIRST RIGHT OF REFUSAL AGREEMENT DRAFTING PROMPT

You are tasked with drafting a comprehensive First Right of Refusal Agreement in connection with a franchise relationship. This agreement establishes the franchisor's preferential right to purchase the franchised business before the franchisee may sell to a third party, ensuring the franchisor maintains control over who operates under its brand and system.

DOCUMENT HEADER AND PARTIES

Draft a formal document header that clearly identifies this as a "RIGHT OF FIRST REFUSAL AGREEMENT" or similar appropriate title. Establish the parties to this agreement with precision, identifying the franchisor and franchisee by their complete legal names, entity types, and states of organization or residence. Reference the underlying Franchise Agreement by its execution date and clarify that this Right of First Refusal Agreement either supplements that agreement or is incorporated as part of the franchise relationship. Ensure the introductory paragraph establishes the effective date of this agreement and provides appropriate context for why the parties are entering into this arrangement.

GRANT OF THE RIGHT OF FIRST REFUSAL

Articulate the core grant of the right of first refusal with specificity and clarity. Explain that if the franchisee receives a bona fide, arm's-length offer from a third party to purchase the franchised business, the franchise assets, or any controlling ownership interest in the franchisee entity, the franchisee is obligated to first offer the franchisor the opportunity to purchase on identical terms and conditions. Define what constitutes a "bona fide offer" and specify whether this right applies to offers for stock purchases, asset purchases, mergers, or other forms of business transfers. Address whether the right applies to partial interests or only to transfers of controlling interests, and clarify whether gifts, transfers to family members, or transfers to affiliated entities trigger this right. The provision should make clear that the franchisee may not proceed with any covered transaction without first complying with the notice and waiting period requirements set forth in this agreement.

NOTICE REQUIREMENTS AND PROCEDURES

Establish a detailed notice procedure that the franchisee must follow upon receiving a qualifying third-party offer. Specify that the franchisee must provide written notice to the franchisor within a defined timeframe after receiving the offer, and that this notice must include a complete copy of the third-party offer, all related term sheets, letters of intent, purchase agreements, and supporting documentation. Require the franchisee to provide sufficient detail about the proposed purchaser, the purchase price, payment terms, financing contingencies, closing timeline, and all other material terms and conditions. Designate the specific address, email, or other contact information where such notice must be sent to the franchisor, and specify whether notice is effective upon sending or upon receipt. Include provisions addressing what happens if the franchisee fails to provide complete information or attempts to structure a transaction to avoid triggering the right of first refusal.

FRANCHISOR'S EXERCISE PERIOD AND ELECTION

Define the time period during which the franchisor may exercise its right of first refusal, typically ranging from thirty to sixty days after receipt of complete notice from the franchisee. Specify that time is of the essence and that the franchisor must provide written notice of its election to purchase within this period. Address whether the franchisor may request additional information or conduct due diligence during this period, and if so, whether such requests extend the exercise period. Clarify the form that the franchisor's acceptance must take and establish that upon the franchisor's timely exercise of the right, a binding agreement to purchase is formed on the same terms as the third-party offer. Include provisions addressing how the franchisor may modify certain terms that are personal to the third-party offeror, such as financing contingencies or employment arrangements, while maintaining economic equivalence to the third-party offer.

CONSEQUENCES OF NON-EXERCISE AND SUBSEQUENT SALE RESTRICTIONS

Articulate what occurs if the franchisor does not exercise its right of first refusal within the specified period. Provide that the franchisee is then free to proceed with the sale to the third party, but only on terms that are materially identical to those presented to the franchisor. Specify a time period during which the franchisee must complete the third-party sale, typically between ninety and one hundred eighty days, after which the right of first refusal is reinstated. Establish that any material modification to the price, terms, or conditions of the third-party offer requires the franchisee to re-submit the modified offer to the franchisor and restart the notice and exercise period. Define what constitutes a "material" change, providing examples such as:

• A reduction in purchase price exceeding a specified percentage or dollar amount
• Changes to payment terms, financing arrangements, or security provisions
• Modifications to assumed liabilities or excluded assets
• Extensions of closing timelines beyond specified thresholds
• Changes in the identity of the purchaser or addition of new parties

SCOPE AND APPLICABILITY

Define comprehensively the scope of transactions and transfers subject to this right of first refusal. Specify that the right applies not only to direct sales of the franchised business assets but also to any transfer of a controlling ownership interest in the franchisee entity, whether accomplished through stock sales, membership interest transfers, mergers, consolidations, or other reorganizations. Address whether the right is triggered by a single transaction transferring control or by a series of related transactions that cumulatively result in a change of control. Clarify how the right applies in the context of multi-unit franchisees and whether it extends to transfers of individual franchise locations or only to transfers of the entire franchised business. Consider including carve-outs for transfers that do not implicate the franchisor's legitimate interests, such as estate planning transfers to family trusts, transfers between existing owners, or pledges of interests as collateral, while ensuring appropriate approval rights are maintained.

VALUATION AND PRICING MECHANISMS

Address how the purchase price will be determined when the franchisor exercises its right. If the franchisor is matching a third-party offer, confirm that the purchase price will be identical to that offered by the third party. Consider including provisions for situations where the third-party offer includes non-cash consideration, earn-outs, or other contingent payments, establishing how the franchisor will provide equivalent value. If the agreement contemplates scenarios where the right of first refusal may be triggered without a third-party offer, include a valuation mechanism such as agreement on an independent appraiser, use of a specific valuation methodology, or a formula based on financial metrics. Address who bears the costs of any valuation process and establish timelines for completing any required appraisals.

CLOSING PROCEDURES AND CONDITIONS

Establish the procedures and timeline for closing the transaction if the franchisor exercises its right of first refusal. Specify a closing date that mirrors the timeline in the third-party offer or establish a reasonable period, typically thirty to ninety days from the franchisor's exercise notice. Address standard closing conditions, including delivery of clear title, transfer of all franchise-related assets, assignment of contracts and leases, delivery of financial statements and records, and execution of customary closing documents. Clarify which party bears responsibility for obtaining necessary consents, regulatory approvals, or third-party approvals required for the transfer. Include provisions allocating closing costs, prorations, and transfer taxes. Address what happens if either party fails to close the transaction, including potential remedies such as specific performance or damages.

RELATIONSHIP TO FRANCHISE AGREEMENT

Clarify the relationship between this Right of First Refusal Agreement and the underlying Franchise Agreement. Specify whether this agreement supplements, amends, or is incorporated into the Franchise Agreement, and address how conflicts between the documents will be resolved. Confirm that all transfer restrictions, approval requirements, and other provisions in the Franchise Agreement remain in full force and effect, and that compliance with this Right of First Refusal Agreement does not eliminate the need for franchisor approval of any transfer under the Franchise Agreement. Consider whether the right of first refusal survives termination or expiration of the Franchise Agreement and under what circumstances.

REPRESENTATIONS AND WARRANTIES

Include appropriate representations and warranties from the franchisee regarding the bona fide nature of any third-party offer, confirming that the offer was made at arm's length, that the franchisee has not solicited or structured the offer to avoid the right of first refusal, and that all material terms have been disclosed to the franchisor. Consider including representations regarding the franchisee's ownership of the business, absence of other encumbrances or rights that would prevent the transfer, and compliance with all franchise agreement obligations. Address the consequences of breach of these representations, including potential termination rights and damages.

REMEDIES AND ENFORCEMENT

Establish the remedies available to the franchisor if the franchisee violates this agreement by failing to provide proper notice, selling to a third party during the exercise period, or completing a sale on terms materially different from those presented to the franchisor. Specify that the franchisor is entitled to seek injunctive relief and specific performance, given that monetary damages may be inadequate to protect the franchisor's interests in controlling its franchise system. Include provisions for recovery of attorneys' fees and costs by the prevailing party in any dispute arising from this agreement. Consider whether violations of this agreement constitute grounds for termination of the Franchise Agreement.

GENERAL PROVISIONS

Include standard miscellaneous provisions appropriate for this type of agreement. Address governing law and jurisdiction, specifying which state's laws will apply and where disputes must be brought. Include a provision stating that this agreement may only be amended in writing signed by both parties. Address assignment rights, noting that the franchisor's rights under this agreement may be assigned to successors or affiliates, while the franchisee's obligations run with the business and bind successors. Include a severability clause providing that if any provision is found unenforceable, the remainder of the agreement continues in effect. Add an integration clause confirming that this agreement, together with the Franchise Agreement, constitutes the entire understanding between the parties regarding the subject matter. Include notice provisions specifying how formal notices under this agreement must be delivered.

SIGNATURE BLOCKS

Conclude the agreement with appropriate signature blocks for both the franchisor and franchisee. For entity parties, include signature lines for authorized representatives with their titles indicated, along with printed names. Include date lines for each signature. If the agreement requires notarization or witnesses under applicable law, include appropriate acknowledgment or attestation sections. Consider whether corporate seals or other formalities are required based on the parties' entity types and governing law.

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DRAFTING INSTRUCTIONS: Produce a professional, legally sound agreement that balances the franchisor's legitimate interest in controlling its franchise system with the franchisee's right to realize value from the business. Use clear, unambiguous language that minimizes potential disputes about interpretation. Ensure all time periods, notice requirements, and procedural steps are specific and workable. Tailor the scope and terms to the specific franchise relationship and business context. Consider the enforceability of the provisions under applicable state law, particularly regarding restraints on alienation and reasonableness of time periods and scope.