Pub. 55 2014-2015 Issue 1

20 T oday, most dealer agreements provide manufacturers with a right of first refusal (“ROFR”) in a dealership buy/ sell. This right allows manufacturers to replace the contracted buyer with the buyer of their choice. When the right is exer- cised, the manufacturer’s replacement buyer completes the transaction on the exact same terms as negotiated by the original buyer. In order for the right of first refusal to work, the replacement buyer must fully perform on the original buyer’s purchase agreement. A troublesome industry trend is cur- rently emerging where manufacturers are exercising this right at an increasing rate. As the buy/sell market continues to expand, manufacturers are using their right of first refusal as a means to exert more control over their dealer network. Fortunately, Texas’ franchise laws prohibit this right. This prohibition along with Texas’ strong economy and business-friendly environ- ment is likely why Texas franchises are in high demand. In fact, Texas franchises currently trade for a premium over fran- chises in other states. Historically, domestic manufacturers were the most active exercisers of the ROFR. Today, almost every manufac- turer is considering their ROFR rights, when available to them. In the last twelve months, Mercedes, Audi, Toyota, Nissan, Jaguar, Land Rover and General Motors have exercised this right and flipped a deal to their preferred buyers. In some instances, the right is exer- cised in order to increase the number of minority-owned dealerships. However, in most cases, it is exercised simply be- cause the manufacturer would prefer a different buyer. Today’s active buy/sell market affords the manufacturers many opportunities to exercise this right and control the buy/sell process. There are more buyers seeking franchises than there are franchises being sold. Even at high prices, buyers are willing and able to step into the shoes of another buyer, particularly with manufacturer and/or captive financial assistance. The Risks of the ROFR The Buyer’s Risk The risks of the ROFR are pretty clear from a buyer’s perspective. Even if the manufacturer reimburses the original buyer’s transaction expenses, the buyer’s time and opportunity cost of missing out on other transactions will never be returned. In Kerrigan Advisors’ experience, by the time a purchase agreement is submitted to a manufacturer, the buyer has spent a great deal of time, energy and money. When a buyer has a deal pulled out from under them, it dampens their eagerness for future acquisitions. Buyers become gun shy. The Seller’s Risk Some believe ROFRs pose little risk to sellers, since the replacement buyer is simply performing on the already negoti- ated contract. Unfortunately, when the right is exercised, it does create additional transaction risk for sellers. By way of example, the original buyer can sue the manufacturer claiming the ROFR was not properly exercised. In these cases, the sale of the dealership is often delayed while the parties settle their differences, all the while the sellers’ business is at risk as the sale is public knowledge. Also, in the event a transaction involves multiple franchises, the exercise of a ROFR for a single franchise can terminate the whole transaction or leave the seller with a half completed sale of their group. Finally, The Risks of the ROFR (Right of First Refusal)