The Franchise Memorandum

A California appellate court affirmed a trial court’s ruling that a third party’s offer to purchase a franchise was not a valid, bona fide offer under the terms of a franchise agreement because the purchase price was contingent on the franchise’s future revenues. IJLSF, LLC v. It’s Just Lunch International, LLC, 2021 WL 3012850 (Cal. Ct. App. July 16, 2021). It’s Just Lunch International is the franchisor of the It’s Just Lunch franchise system, which involves dating and matchmaking services. An It’s Just Lunch franchisee received and intended to accept an offer to sell its franchise to a third party, but the final purchase price was based on the franchise’s revenue over the upcoming year. The franchisor sought to exercise its right of first refusal and purchase the franchise on the same terms. The franchisee and the third party objected to the franchisor’s decision and the parties sued each other.

At summary judgment, the trial court held the third party’s offer was a not valid, bona fide offer under the franchise agreement. The parties appealed, and the appellate court affirmed. The appellate court interpreted the plain language of the franchise agreement—which required that any offer include a “purchase price . . . in a dollar amount”—and concluded that it required more definite terms than those offered by the third party. The court reasoned that the requirement that the offer include a set dollar amount provides the franchisor with information it needs to evaluate whether to exercise its right of first refusal. The court further held that the offer was vague because the purchase price would change depending on who operated the franchise and their performance. Finally, the appellate court also held the trial court erred in holding that the franchisor had waived its right under the franchise agreement to reject the purchase offer and remanded for further proceedings on that issue.