Letters of Intent in Franchising

Many franchisors don’t utilize Letters of Intent with prospective franchisees.  In fact, most franchisors send the prospect through their sales and qualification pipeline and then present the prospect with a franchise agreement or a multi-unit agreement if they qualify.  While this process is sufficient for many franchisors’ needs, a Letter of Intent can play an integral role early on in a franchise deal and can often help franchisees better understand their obligations.

There are two types of documents that are used prior to the parties executing a franchise or multi-unit agreement: Term Sheets and Letters of Intent.  Both documents are typically non-binding unless drafted otherwise.  Term Sheets are less formal as they simply outline the key points of a deal in bullet point or list format.  On the other hand, a Letter of Intent outlines the terms of the agreement in a letter or agreement format.

Franchisors may utilize a Letter of Intent when a prospect is going to purchase a single unit, multiple units, company units, or if the prospect is entering into an area developer agreement.  Letters of Intent are even more common in international franchise deals.  The Letter of Intent confirms the parties’ understanding of the terms of the transaction and provides a guide for the attorneys who draft the final agreements.

There are many reasons why a Letter of Intent should be used in franchise transactions.  Some lenders require a Letter of Intent before approving a loan.  In international franchise deals, the Letter of Intent is often drafted in one language and then translated into another to ensure everyone’s on the same page.  If a franchisor uses the same Letter of Intent with every franchise sale, they should include the standard form of that Letter in their Franchise Disclosure Document.

When we draft a Letter of Intent, we make sure to include the following language to ensure that the terms are non-binding: “This Letter of Intent is not a binding document.  Until Franchisor and Applicant have executed an actual Development Agreement or Franchise Agreement, either party may discontinue negotiations at any time for any reason.”

We also usually include the following provision, which serves as an option or a right of refusal on the opportunity: “This Letter of Intent will remain in effect for forty-five (45) day’s from the date of this letter (the “Term”).  Upon the expiration of the Term, if Franchisor and Applicant have not entered into an actual Development Agreement or Franchise Agreement and the parties have not agreed to extend the Term, this Letter of Intent will become null and void.”

Letters of Intent for a single unit franchise deal should include the following:

• The scope of any exclusive territory
• Site selection and construction schedule
• The projected opening date
• Operating principals or managers and related training requirements
• Address of the proposed unit
• Type of unit (i.e., kiosk, free standing, or non-traditional)

Letters of Intent for a multi-unit development deal should address the following:

• The scope of the development territory
• The franchisor’s agreement not to sell a franchise for a particular area during the term of the Letter of Intent
• The development schedule, which should outline the number of units that the prospect will develop and the time period for the development of each unit
• Entity information related to prospect and its owners, if that information is available
• Identity and contact information for personal guarantors
• Any minimum purchasing obligations or other criteria for operation of the units
• Fee structure and payment terms
• Training requirements

Letters of Intent may or may not be appropriate for your franchise.  If you offer primarily multi-unit development deals, as the current trend demonstrates, then a Letter of Intent may serve those deals well in your system.  However, if you have a detailed sales and qualification process and you don’t budge on details in your deals, then a Letter of Intent may not be necessary for your franchise.

If you would like more information about Letters of Intent and whether they would benefit your franchise, contact us today!