The franchise owner isnseeking to borrow money from you and, in exchange for you not getting paid any interest (the zero coupon comment) then he will offer you a right to convert your loan into a small percentage ownership based upon a total franchise value of $125,000. The term of the loan offered seems to be somewhat "iffy" but has a projection of mid-2014. Whether the business worth $125k is impossible to evaluate without seeing the financial statements and, in addition, the term of the loan being so short is suspect because he is not offering you any interest on your loan and then query what you do if he cannotnrepay and you do not want o become a minority owner with no control over the business. To me it sounds like a silly investment absent the ability to take over the business if he defaults or to evaluate the discount to an "alleged" value of $125k is even fair or not. Avvo is not the place for you to get more than I have offered as limited observations.
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This is a business question not a legal question. No one on Avvo knows anything about the franchise or even if Subway allows an owner to sell part of his franchise. Have you done any due dilligence? Have you examined the books? Have you sat outside the store for a day or two and watched the foot traffic? I suggest you consult with a business advisor who knows about the fast food industry.
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The language you quote is total nonsense starting with the words "convertible zero coupon note."
I would run away.
You are asking a business question, not a legal question, but no one sells a percentage of a franchise this way.
The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.
I have represented several Subway franchisees in franchise related matters. While I cannot give you specific legal advice, the franchise agreement will have restrictions on the franchisees ability to transfer or sell a portion of the business, which might subject you to personal guarantees and require that you meet Subways' qualifications and complete training. The rest of your question is really a business issue and those in your situation often must ask themselves whether they want to hold a minority ownership interest and what can be done if you want out.