A Right of First Refusal is a contractual clause that gives the franchisor the first opportunity to purchase a franchisee’s business or ownership interest before it can be sold to another party. This right allows the franchisor to match a third-party offer under the same terms and conditions. It ensures the franchisor retains control over who enters or exits the franchise system.
In franchising, a Right of First Refusal (often abbreviated as ROFR) is a common provision in Franchise Agreements that protects the franchisor’s interest in maintaining consistency and control within the brand. When a franchisee wishes to sell their business, the franchisor must be given the opportunity to purchase it on the same terms offered by a third-party buyer. The franchisee must disclose the details of the proposed sale, including the buyer’s identity, price, and terms. The franchisor then has a limited period—usually 30 to 60 days—to decide whether to exercise the right. If the franchisor declines, the franchisee may proceed with the sale to the third party under the same conditions. This clause helps the franchisor maintain brand integrity and prevents unsuitable or unapproved buyers from entering the system.
Additional Definition: A franchisees contractual right to purchase—if he so decides and if he can meet all conditions of sale established by the franchisor—any additional franchised outlets that may be for sale in the future within a pre-defined territory. This can also apply to a franchisors right to repurchase a franchised unit at the same price as offered by a third party.
The Right of First Refusal originated in commercial real estate and partnership agreements as a tool to maintain control over ownership changes. As franchising grew in the mid-20th century, franchisors adopted the provision to safeguard system uniformity and protect against outside interference or unqualified owners. Over time, it became a standard clause in Franchise Agreements and is now commonly invoked when a franchisee seeks to sell, transfer, or assign their franchise. Courts generally uphold the provision as long as it is exercised fairly, in good faith, and according to the contract’s timing and terms.
Also See: The Educated Franchisee, 3rd Edition
The Right of First Refusal gives franchisors a powerful mechanism to maintain control over the composition of their franchise network. It ensures that ownership transfers align with the franchisor’s strategic and operational goals. For franchisees, while it can limit flexibility in selling their business, it also provides reassurance that their franchise will not be sold to an unqualified competitor. Legal disputes may arise if a franchisor delays or manipulates the process to suppress the sale price, so both parties should follow the clause strictly as written in the Franchise Agreement.
| Step | Description |
|---|---|
| 1. Notice of Intent to Sell | The franchisee notifies the franchisor in writing of their intention to sell the franchise and provides all details of the proposed sale. |
| 2. Disclosure of Third-Party Offer | The franchisee submits the offer, including purchase price, payment terms, and buyer identity, for franchisor review. |
| 3. Franchisor Review Period | The franchisor has a set number of days (typically 30–60) to evaluate and decide whether to exercise its right. |
| 4. Exercise of the Right | If the franchisor chooses to purchase, it must match the third-party offer exactly, including price and terms. |
| 5. Sale Completion | If the franchisor declines or misses the deadline, the franchisee may sell to the approved third party on the same terms. |
'Before selling her franchise, the franchisee notified the franchisor to comply with the Right of First Refusal clause.'
'The franchisor exercised its Right of First Refusal and purchased the franchise to retain control of a key market area.'
'Failure to honor the Right of First Refusal provisions could result in a breach of the Franchise Agreement.'
| Category | Right of First Refusal | Option to Purchase |
|---|---|---|
| Trigger Event | Activated when a third-party offer is received. | Activated at the franchisor’s discretion, often without a third-party offer. |
| Control Level | Reactive—the franchisor must match an external offer. | Proactive—the franchisor can initiate the purchase at any time permitted by the contract. |
| Purpose | Protects against unwanted ownership transfers. | Allows franchisors to strategically buy back locations. |
| Fairness Standard | Must mirror the third-party terms exactly. | Defined by agreed-upon valuation methods. |
| Example | “The franchisor matched the buyer’s offer under its right of first refusal.” | “The franchisor invoked its option to purchase the franchise.” |
A Right of First Refusal gives the franchisor priority to purchase a franchise before it is sold to another party, preserving brand control and market strategy. While it limits the franchisee’s flexibility in selling, it ensures the integrity of the franchise system and provides an orderly process for ownership transitions.
