While building a franchise system used to be a long-term endeavor, it is becoming increasingly common for companies to establish franchise systems in order to sell out and move on. We have seen several reports of franchisors selling relatively “young” systems in recent years; and while franchisor founders may say that their decisions are driven by doing what is best for their franchisees, the reality is that selling out offers both a substantial payday and the ability to avoid ongoing risk related to the operation and management of the franchise system.
So, as a franchisee, what does it really mean if your franchisor’s founders or executives decide it’s time to sell? Should you be worried (and should you consider talking to a franchise lawyer about your options)? Or are you protected by your franchise agreement?
Understanding the Implications of Franchise Acquisitions for Franchisees
As is always the case with these types of questions, the answer is, “It depends.” In some cases, having your franchisor bought out by a larger company can be a good thing. Sometimes, business owners who decide to franchise their concepts get in over their heads, and having a team of experienced franchise executives take the helm can help to improve and stabilize the franchise system as a whole.
On the other hand, whereas a franchise system’s founders may be passionate about the brand and focused on building one-on-one relationships with franchisees, this might not be the case with a new owner. It almost certainly won’t be the case if a private equity firm steps in and acquires the brand as an investment. In these scenarios, franchisees can suddenly find themselves without the support and relationships on which they relied previously, and this can quickly create a much more challenging situation.
Additionally, new franchise system owners will often want to make changes. These changes can vary widely—from taking a more aggressive approach to selling franchises in a particular area (and potentially creating more intra-brand competition) to requiring franchisees to adopt new technologies at their expense. Whether these changes benefit individual franchisees or not, all franchisees will generally have little (if any) choice but to accept the new franchisor’s new decisions.
But, one important protection that existing franchisees have is that a new franchisor cannot terminate their franchise agreements without cause. In other words, a new franchisor cannot come in and clean house (at least not with respect to franchisees). Your franchisor, new or old, can only terminate your franchise agreement in accordance with its terms; and, depending on the state in which you operate, you may be protected by a state franchise law as well.
As a franchise, what should you do to prepare to deal with a new franchisor? Ultimately, there may not be much that you can do, if anything. If the new franchisor asks for feedback about the system, you can certainly participate, though you should do so with the understanding that your input is unlikely to carry much, if any, weight in the franchisor’s final decision-making process.
What if the New Franchisor Makes Changes that Harm Your Franchise?
Since franchisors generally cannot terminate franchisees without cause, one of the biggest risks franchisees face due to acquisitions is the risk of incurring substantial additional expenses due to system “upgrades” and modifications. Franchisors generally reserve the right to make changes to the system at their discretion, and franchise agreements generally require franchisees to adapt to changes at their expense.
So, even if you’ve been operating for years with the same point-of-sale (POS) system, and even if your customers are fully satisfied with the products you offer or the equipment in your facility, if a new franchisor says it’s time to make changes, you will need to comply. If you can’t afford to comply, then you might need to look into additional financing options in order to keep your franchise. This, of course, is a high-risk approach—particularly when you aren’t sure that change is what your customers want.
Unfortunately, franchisees often have little redress in this scenario. Even if ill-informed, new franchisors’ decisions are usually based on projections that they will lead to growth. You might be able to band together with other similarly-situated franchisees; but whether the franchisor will be willing to bend, especially as a new owner, is far from guaranteed.
What if You Lose Your Franchise After an Acquisition?
While new franchisors don’t have termination rights above and beyond those available to their predecessors, they may still take steps to target certain geographic regions or remove “underperforming” franchisees. If you are concerned about losing your franchise after an acquisition, here are some important considerations to keep in mind:
- Franchisors can only terminate their franchisees in compliance with the terms of their franchise agreements and, where applicable, state franchise relationship laws. If your new franchisor terminates your franchise agreement improperly, you may be entitled to damages for wrongful termination.
- Another strategy franchisors often use to remove unwanted franchisees is refusing to renew their franchise agreements. Here, too, the terms of the franchise agreement establish both parties’ rights, and state franchise relationship laws may provide franchisees with additional protections as well.
- If you are concerned about losing your franchise, whether through termination or non-renewal, it is best to address your situation proactively. Generally speaking, franchisees have more options while their franchise agreements are still active. An experienced franchise lawyer can help you evaluate your options; and, if necessary, your lawyer can engage with the new franchisor or take legal action on your behalf.
Discuss Your Situation with National Franchise Lawyer Jeffrey M. Goldstein
If you have questions or concerns about your franchisor getting bought out by a new owner, we encourage you to get in touch. National franchise lawyer Jeffrey M. Goldstein can help you understand your situation and make informed decisions about how to move forward. To schedule an appointment with Mr. Goldstein as soon as possible, please call 202-293-3947 or request a free consultation online today.
