When you decide to open a franchise, your agreement with the franchisor likely includes provisions about the use of the name, discounts on products, and your sale of the business. It may also include provisions about what happens when the franchisor decides to sell or merge with another company.
As an independent operator, you need to know what franchise businesses should consider when undergoing a merger or acquisition. At Fee Smith & Sharp, we can help you examine these matters and what they mean to your company.
Specific Provisions in Franchise Agreements Matter
When you became a franchise owner, you received a lot of information about the parent company and the terms of your agreement with that company. Regardless of whether you purchased your franchise rights yesterday or years ago, those original terms matter, and you should review them with an attorney as soon as possible. Be sure to review those original terms alongside any updates or amendments made since that time.
Pay particular attention to the following details:
- Information the parent company provided about future plans
- The financial prospectus for the other company
- Ownership structure and how changes to it impact your franchise location(s)
- How the parent company controls operations of your franchise location(s)
- Any terms that provide you with a vote or other input into mergers or acquisitions
Successful decisions depend on a strong understanding of what cannot change upon a transfer of ownership. You need to know what impact, if any, the merger or acquisition will have on your franchise fees. You should also check the arrangements that must be made if you want to sell your franchise or continue your business without the parent company’s branding and corporate support.
Participate in the Process
Both the new and former ownership may offer opportunities for you to engage with them, hear information about their plans for the future of franchises, and ask questions relevant to the merger or acquisition. Take advantage of each opportunity to speak with them. This will give you as much notice as possible about things like corporate branding (such as your logos, slogans, and signage) and changes to your customers’ and employees’ experiences.
The Federal Trade Commission (FTC) regulates franchises. When you are preparing for meetings or phone calls with your parent company or the organization merging with it or buying from it, prepare by reviewing the requirements the FTC places on franchisors. Staying ahead of change will be critical to your success.
Financial Disclosure Document
The Federal Trade Commission (FTC) maintains a Consumer’s Guide on its website, which includes the requirements for the Franchise Disclosure Document (FDD). You should have received this when considering the purchase of your franchise location(s). The FDD includes:
- Franchisor’s Background – How long it has existed and its major competition
- Business Background – The executives in place and their backgrounds
- Litigation History – Any prior litigation and any felony history that may impact your franchise ownership
- Bankruptcy – Recent filings by the company or its executives
- Initial and Ongoing Costs – What it takes to get started and what is non-refundable, including your start-up costs like signage and legal or accounting costs
- Supplier, Territory, and Customer Restrictions – What your limits are
- Franchisor’s Advertising and Training – What the company will provide and expect you to provide toward the company’s success
- Renewal, Termination, Transfer, and Dispute Resolution – What you owe the franchisor after the franchise agreement is terminated and how disputes between the franchisor and franchisee will be handled
- Financial Performance Representations – What the franchisor told you at the time of consideration about its financial performance
- Franchisee and Franchise System Information – Charts to provide details about the franchise’s growth and any owner turnover
- Financial Statements – Three most recent audited financial statements
- Information About State Laws That May Affect You – Statutes such as the Texas Business Code
Completing the appropriate forms and meeting tax obligations can be challenging without guidance, especially if this is your first time engaging in mergers and acquisitions. Working with a reputable business law attorney can make the process go more smoothly and avoid unnecessary mistakes.
Change Management With Proper Advice Can Help
“Change management” is a critical component of franchise administration, yet most people are unfamiliar with what it means for their business growth. Proper planning and execution for change management are vital for your company’s success. Depending on your immediate circumstances, number of locations you own, and number of employees you have, change management may require a tremendous amount of planning and action.
There may be significant shifts in the culture, strategy, and leadership. It’s essential to consult with an attorney who understands not only the law but also the business of your franchise operations. They can help you manage change regardless of whether that change impacts only you or a team of hundreds across multiple locations.
Good change management includes a lot of communication, especially if you have team members who may be reading about your business change in the news or hearing rumors in the company break room. As soon as it is appropriate, meet with your team or send an email to keep employees informed and help reduce confusion caused by secondhand sources like colleagues without correct information or press eager to be “first to print.”
Merger and Acquisition Can Work to Your Benefit
With the proper guidance and care toward what you have worked to build, you can have continued, and even improved, success following a merger or acquisition. By working with experienced business and commercial litigation attorneys, you can take steps to strengthen your standing as you move into a new chapter for your company. Your legal team can guide you through the nuances of critical decisions during this transition and manage the impact of those decisions.
The actions you take during a merger or acquisition in a franchise business can have a tremendous impact on the future of your business’ growth. Do not try to navigate this process alone. Call Fee, Smith & Sharp LLP for a consultation today and partner with our seasoned attorneys who can help you prepare documents, contracts, strategies, and change management plans.
