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Lawletter No. 185 10 questions that service station franchise sellers should ask In Lawletter No. 183, we took a look at service station business sales from the buyer's point of view. We urge any party to such a sale to obtain legal representations. This month, we suggest ten questions that the prospective seller should ask. (1) How do I get the oil company to start processing the transaction? Send the written notification required by California Business & Professions Code section 21148. It must include a copy of the sales contract including all terms and conditions, and an acknowledgment of the franchisor's 30-day right-of-first refusal. The notice should specifically cite the code section. Until you do this, the company has no obligation to start processing the proposed dealer change. (2) What if my buyer backs out? If the buyer refuses to perform after signing a contract, e.g., he refuses to pay the full agreed on purchase price, you will probably have no alternative to terminating the contract and finding another buyer and/or suing the buyer for damages. In the meantime, you will have to either keep the station or turn it back to the oil company. A buyer who knows that you must for some personal, legal or business reason get out of the station by a certain date thus has a strong incentive to drag his feet and try to get the price reduced. (3) If my buyer defaults, can I take the money he deposited in escrow? Not without his consent or a court order. An escrow company will generally not release funds without the consent of all parties or a court order. You can of course, keep whatever money he puts in escrow tied up if he fails to perform. The seller would therefore want to tie up as much of the buyer's money as possible in escrow. (4) What is a liquidated damages clause and how does it affect me as a seller? A "liquidated damages" clause is a contract provision which states that the parties agree that it would be difficult or impossible to determine the precise amount of money damages caused the other party if one of them defaults. Therefore, the parties agree to "fix" the amount of damages for default in advance. Typically, the purchaser of a service station business makes a deposit in escrow to show good faith. The sales contract or escrow instructions usually provide that the seller will be entitled to part or all of the deposit as "liquidated damages" if the buyer defaults. It is in fact usually difficult or impossible to determine the exact amount of damages that the buyer's default will cause the seller. For example, the traditional law of contract says that the measure of damages would be the difference between the sales price established by contract and the actual market value of the business. This is why liquidated damages clauses are used. The larger the deposit in escrow, and the larger the portion of that deposit which constitutes liquidated damages, the better off the seller is. (5) What if I want to back out? If you think that there might be any reason why you might want to get out of the deal, see your lawyer before you sign any contract, open an escrow or send any formal notice to the franchisor. You may want to include express contingencies which must be fulfilled in order to close the transaction, or you may want to include a liquidated damages clause limiting your liability if you as the seller default. If you decide that you want to get out of a deal you have already signed a contract on, and you have not taken the steps described in the preceding paragraph, see your lawyer before you do anything or say anything more to the seller. Otherwise you may find yourself on the losing end of a lawsuit for damages or a suit requesting a court order compelling you to perform the contract. If you are using a broker, be aware that the broker will still want to be paid even if you back out, regardless of whether the buyer takes any action against you. Many broker's commission agreements now provide that you will be liable for the broker's full commission once he produces a ready, willing and able buyer, regardless of whether the transaction is completed.
(6) Should I use a broker? Maybe. In some cases, brokers may be able to locate buyers that you might not find. After all, this is what they do for a living. But make sure you understand any brokerage agreements you sign. For example, the commission agreement might include a clause such as that described in the preceding paragraph. In some cases, the broker may use a standard "Receipt for Deposit" form which in effect constitutes both a contract to sell the business and an unconditional promise to pay the broker his full commission regardless of whether the deal is completed. Brokers now also tend to include "arbitration" clauses in their commission agreements, which makes it much easier and cheaper to pursue a legal claim against you. So read such documents very carefully before signing. Do not hesitate to have your lawyer review the commission agreement before you sign. (7) Will I have to pay a transfer fee? Probably. California Business & Professions Code section 21148 allows the oil company to charge the dealer a transfer fee for the privilege of assigning the franchise agreements, i.e., the lease, supply contract and related documents. Unless the parties agree differently in writing, this fee will have to be paid by the seller. Most franchisors charge a transfer fee. Chevron dealers should seriously consider invoking the arbitration clause of the dealer lease to challenge the fee, e.g., see Lawletter No. 170. (8) Will I have to sign a release or a mutual termination agreement in order to sell the business? No. Under applicable law, you have the legal right to assign your franchise to a qualified buyer, as long as you satisfy the requirements of Business & Professions Code section 21148. The signing of a release or mutual termination agreement is not one of those requirements. However, if you do sign such a document, the chances are that you will be giving up any legal right to sue the franchisor. We have known oil companies to slide mutuals or releases into the transfer documents when processing an assignment. It is our experience that franchisors know that they cannot demand such a release or agreement as a condition of permitting a franchise transfer. Before you sign any such document, see your lawyer. (9) What if the oil company scares off my buyer by telling him the station will be closed soon? You may be out of luck. Nothing in the law prevents an oil company from making an honest disclosure of its intention to close the station at a specified future date. In fact, refiners are frequently sued for allegedly failing to disclose such an intention. Of course, if the oil company is lying in order to kill your deal, it may be guilty of fraud or wrongful interference with your contract. (10) If the buyer doesn't keep up his payments, can I foreclose on the business? Almost certainly not. Every service station franchise agreement we have seen flatly prohibits pledging a service station franchise, lease or supply contract as collateral for a debt. It does not appear that anything in the service station assignment law--Business & Professions Code section 21148--authorizes such a pledge. Franchisors will in nearly every case flatly refuse to process a dealer change where the sales contract permits the seller to foreclose. |
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