Three California franchisees in the BrightStar Owners Association are suing BrightStar Care, the home health care franchise founded by CEO Shelly Sun, over a “new call option” in its 2022 franchise disclosure document. They call that option illegal under the California Franchise Act and a violation of California’s Unfair Competition Law.
The call option gives the franchisor, “at its discretion, the right to terminate the franchise agreement and purchase the franchisee’s assets at a predetermined price, which may be less than fair market value and prevent resale in the open market”, a press. it is stated in the announcement of BSH.
The call option is a “poison pill that harms the plaintiffs and other franchisees in California by reducing the value of their franchised businesses and making them potentially unsaleable,” according to the lawsuit.
“There are people just jumping off the side of the Titanic right now, people trying to get out of Dodge. It’s changed everything. It’s like defranchising the system,” said Mark Woodsum, president of BOA and an owner of four BrightStar Care territories in Orange County, California. He has been part of the system for eight years.
“There are two concerns. One is, is this de-franchising the system, and there are a lot of people talking about it at the moment. And the other thing people are concerned about is if you have a company, a car, a house, anything, you hope to have an open market when you’re selling. And now, the market to a certain extent is Shelly Sun,” he said.
“I’m one for example. I was thinking about buying” another BrightStar Care territory six months ago, “and now our lawyers and brokers have advised us, until this is resolved, don’t sign anything,” he continued. “Don’t buy anything. Don’t pass go. We’re all over the place.” Woodsum says there are about 170 owners in the BrightStar Homeowners Association.
Call option imperative’ says the founder
Shelly Sun, founder and CEO of BrightStar Care, said the call option is “imperative with so many changes within the industry. To meet these changes, our brand needs to be able to evolve. What we’re seeing is a lot more pay government and third-party payments to make home care more available to more people.” Examples are Medicare Advantage and the Veterans Administration.
“Some of our franchisees are resistant to doing what is necessary to respond to those market changes, but the health of our brand requires that we embrace these changes across the system,” she said.
In addition, “we are in a market where many of our third-party payers are changing how they get paid. Most of our payers have been paid on a fee-for-service basis. They will in the future, if not are already, get paid for results,” she said. “So it will no longer be an hourly fee. Quality data, consistency” will be key in that “results-based” pay structure.
“When we say we’ll fill an order, we’ll fill an order” across the system. “That doesn’t mean I can have 60 percent of my franchisees that can fulfill an order,” and the rest can’t.
Shelly Sun and other home health care franchise leaders discuss the future of the industry.
She defended the call option as a way to allow franchisees unwilling to change to exit the system at a fair price and pointed to a formula presented in the FDD that she said includes premiums for sellers.
“We believe they are an additional amount for franchisees, certainly nothing below market. And if they don’t agree with the table, they can ask for an independent appraiser and we’ll split the cost on top of that,” she said.
Today, most home health care is privately paid for, which only a small percentage of clients can afford, “especially when we go into a recession,” Sun said, but that’s changing rapidly. “It can’t just be for the richest of the rich, but it has to be for everyone. That’s hard for a lot of” franchisees to understand.
“So I think some are confused and don’t understand the purpose of the call option. I think it’s actually fully intended if the franchisee doesn’t want to suit or won’t suit, that gives them some tools to monetize” their wealth.
Lawyer: “It was a shock for me”
Bryan Dillon of Lagarias, Napell & Dillon, attorney for the BrightStar Owners Association, said he has not seen a so-called call option in a franchise agreement before. “It was a shock to me and I was surprised that one of my partners thought he had seen this 20, 30 years ago. But I don’t remember anything in the last 23 years,” when he worked on exclusive contracts.
“I’ve never heard of that before. Even calling this a call option, we’ve done what we call call options in other types of deals, but the difference is that those types of deals are not protected by the laws of the franchise. Although it may be perfectly fine in a partnership agreement or some other type of agreement, when you get into a franchise agreement” there are protections against it.
“You have states like California that have franchise laws that expressly prohibit franchisors from entering into and terminating a franchise agreement without good cause. “It’s not going to be good cause. All of these statutes are very similar in states that have this prohibition. “Because the franchisor wants to buy you out is not a good reason,” Dillon said.
BOA is first challenging the subpoena in California, with three plaintiffs in the state, and will then seek to do so in other states where BrightStar Care operates. “There are 22 states that regulate franchising,” Dillon said. “There are over 100 franchisees in the BrightStar system alone in states that have franchise laws.”
Woodsum said BOA members believe Sun wants to buy franchises and make the system largely corporate-owned in order to attract a strategic partner, such as CVS’s recently announced $8 billion bid to buy the health care provider. at home Signify.
“She’s looking at a very different perspective on the future of home health care than we are as owners. She’s looking at it as an ongoing strategic partnership,” he said.
“She’s talking openly, she’s had discussions with strategic partners and things like that. That’s on the table, so to do that, the call option is necessary. Our view is, this is a trillion dollar industry. We” it’s a very small part of that, and we’ve been very successful,” Woodsum said.
“My business has grown over the last four years, over 60 percent a year. We have great opportunities and think we can continue to grow where we are.”
Dillon said, “That’s what BOA believes is happening. Their understanding is that it wants to bring all of these together, or make them corporate stores or have large regional franchises instead of franchises. small.”
Sun, a former president of the International Franchise Association and a pioneering founder who began franchising BrightStar Care in 2005, dismissed the notion that her goal is to “unbundle the franchise.” BrightStar Care has 365 total locations, 13 of which are corporately owned.
“On a general level, we’re very pro-franchise. Even 10 years from now, I couldn’t imagine being less than 80 percent franchise,” Sun said. “We want a brand that’s growing. We want a brand that’s relevant.”