Procedures and Criteria for Evaluating Proposed Franchise/Dealership Transfers

Introduction

• Manufacturers/franchisors typically exercise great caution in vetting potential dealers/franchisees before awarding the dealership or franchise
• Similar care ought to be exercised when deciding whether to allow an existing dealer/franchisee to transfer or sell its business to a third party
• However, depending on the state and the statutory scheme that applies to the business (e.g., motor vehicles vs. farm/industrial equipment vs. general franchise laws) there may be limitations on the right to approve/reject a proposed transfer and on the criteria that a manufacturer may consider in doing so
• Legislatures and courts have to strike a delicate balance
  • Permissible procedures and criteria for evaluation must:
    • not unduly restrict dealers from exercising economic freedom; and
    • protect a franchisor’s ability to control its system of distribution, dealer network, and brand reputation
• Why Should You Care About This Topic?
  • Depending upon the nature of the dealer network, this topic may become increasingly prevalent in the near future as baby boomers plan to retire and want to capitalize on the value of the business that they have cultivated
  • 2010 survey of yard & garden equipment dealers: “A mature, aging dealer network is approaching a crossroads … 23% of dealership owners are over the age of 60, and another 38% are over the age of 50 … 30% have a plan to transfer ownership”