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Law Pro
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Category: Business Law
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Experience:  20 years experience in business law - sole proprietor, partnership, and corporations
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I am a 50% member of an llc, which has signed a franchise agreement.

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I am a 50% member of an llc, which has signed a franchise agreement. At the time, we had conditional approval from a bank where I had done business previously. Unfortunately that business deal did not work out and my old partner and I defaulted on that loan. The bank conditionally approved financing for this new deal (new partner, new company), however I was recently advised that my old default could derail our attempts to finance the new franchise. The bank officer advised me to temporarily remove myself from the company and apply with the company wholly owned by my partner (whose credit is good) and re-purchase my interest upon approval and funding of the loan. Can I do that? Will it affect the franchise agreement. (Under the FA a transfer of control requires corporate approval.) Would some sort of buy/sell agreement or cross purchase agreement work?
Submitted: 1 year ago.
Category: Business Law
Expert:  Law Pro replied 1 year ago.
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You are stating that pursuant to the Franchise Agreement that the franchisor needs to approve/consent to a change in ownership of the LLC - correct?

How is your LLC set up - a member managed or manager managed?

Member-managed LLCs work like this: All members participate in the decision-making process of the LLC. Each member is an agent of the LLC and each member has a vote in business decisions...." (LLRX) Each member has the authority to make decisions on behalf of the company, but contracts and loan agreements must be approved by a majority of the members.

Manager-managed LLCs relinquish the authority of the members to the manager or managers, who become agents of the company. A manager may be a member but does not have to be. A manager may be another LLC or a corporation, unless your state sets restrictions on the types of entities that may be managers of an LLC.

Customer: replied 1 year ago.

Yes. Under the Franchise Agreement the Franchisor must approve any change in control. There is also a fee associated with the transfer/approval.


 


The LLC is member managed with myself and the other member each having a 50% membership interest. The operating agreement contains a buy/sell provision with a 30 day notice provision and a right of 1st refusal belonging to the entity.


 


I wish for the transfer to be temporary, preferably conditional. (Something like after the loan is funded, I must be allowed to repurchase my interest for a designated price.) The goal is not to remove me permanently, just to clear the way for the financing and re-establish my membership in the company without triggering the approval process (or any associated charges) with the Franchisor.


 

Expert:  Law Pro replied 1 year ago.
How about changing from a member managed LLC to a manager managed LLC? That would circumvent and changes that you would have to notice them of.

Second, as to a "temporary" change or transfer of your LLC ownership - you would have to have a contract specifying at your option when and how you could buy back your interest. That you sell your interst to the other LLC member and that, at your option, you can buy back your LLC interest for a sum certain and within a period of time. The amount doesn't have to be substantial and the period can be a long time.

If you change to a manager managed LLC then when you buy back in - you would not have to notice the franchisor.
Law Pro, Attorney
Category: Business Law
Satisfied Customers: 24031
Experience: 20 years experience in business law - sole proprietor, partnership, and corporations
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