Of the many different reasons why franchises are acquired, the
one that seems to come up most often is that the entrepreneur who
founded the business is simply ready to move into something else,
according to Brian Cole, senior attorney with the Los Angeles-based
law firm of Jenkens & Gilchrist LLP. And considering a
franchise's founder can't stick around forever, the
possibility that your franchise will someday be acquired is real.
"Almost every franchise business will eventually be up for
sale at some point in its life," Cole says.
If the founder leaves and new owners come in, does that spell
the end of your close-knit system...or even your business?
Franchise Zone spoke with Cole, who worked for 15 years in Pizza
Hut's franchise division, about exactly what happens when a
franchise is acquired and how this process can go smoothly for
everyone involved.
Franchise Zone: At what point in the acquisition process
should franchisees be informed about the sale?
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Brian Cole: Generally not
until after a definitive agreement has been signed for the sale. At
that point, whether the business will be sold or not is more than
mere speculation. Often parties talk about doing a transaction and
won't go forward with it, typically because the parties
can't agree on the price or the buyer can't obtain the
financing. Making an announcement about a sale before there's a
definitive agreement is difficult because there's a chance it
may not occur.
What could happen if the announcement is made too
soon?
There's always a risk that it will be difficult to make
franchise sales in that period, and there's an increased chance
of franchises losing employees due to uncertainty. It's also
more difficult to get financing when the lenders think current
ownership doesn't have a long-term commitment to the
business.
What kind of input should franchisees have in the possible
sale of their franchise company?
Generally, the ownership of the franchisor is not something
franchisees have a right to expect to influence. They have
contractual rights with the franchisor that won't be affected
by the sale, but they can't expect to change the outcome of the
sale process, except in those instances where they're
interested in buying it themselves.
Are there any signs that would tell franchisees their
franchise may be up for sale?
One obvious sign would be if something happens to the founder of
the company; an accident or illness or death could obviously cause
the business to be up for sale. A less dramatic sign would be if
the business is drifting and no one seems to be paying attention to
it. That may indicate that the franchisor is focusing more on
selling the business than on the business itself, or it may simply
indicate that the owner of the business has lost interest, in which
case a sale may be the best thing the franchisees could wish
for.
Are changes ever made to the concept as far as décor,
name, things like that?
Those kinds of changes have been reported. But more often, when
a business is sold, it continues to be operated as it was prior to
the sale, just under new ownership.
What can the franchisor do to make an acquisition proceed
more smoothly for everybody involved: franchisees, seller and
buyer?
One of the important things franchisors can do is to
communicate. This may be affected by securities laws, but as soon
as it's possible to communicate to the employees and to the
franchisees about what's going to happen and what the plans are
for the business, the better off the franchise is. One of the risks
in any transaction is the uncertainty-people not knowing what the
future holds-so the sooner they know what the plans are, the
better.
How much should franchisees be told?
Once the transaction has been publicly announced, they should be
told as much as the company feels comfortable making public,
because franchisors can't assume the franchisees will maintain
confidentiality. But in terms of the general plans for the
business-anything going on that's going to be disclosed
publicly anyway-it would be good for the franchisor to let the
franchisees know.
Should franchisees be told before announcements are made to
the general public?
If the franchise is a publicly traded company, it runs the risk
of violating the securities laws if the franchisor does that. If
neither the company being bought nor sold is publicly traded, it
may be wise to tell them a short time before the announcement is
made publicly.
In your experience, when these transfers are made, does it
benefit the business more than it hurts it?
In the long run, it does. Franchisees often regret the change,
particularly when they go from being a small privately held company
to being owned by a public company. They miss the closeness. But on
the whole, the transactions tend to benefit everyone, franchisee
and franchisor alike.
As far as the culture change goes, what can the buyer do to
make this an easier transition for the franchisees? Should they try
to replicate the old culture, or do the franchisees just have to
get used to being part of the new culture?
That varies. Certainly in some instances people try to impose a
new culture on the company that's acquired, and often that ends
up causing more problems than it solves because of the clash.
It's often better if the buyer allows the acquired company,
particularly if it's a relatively large and established
company, to retain its own culture instead of trying to change
everything. Having the franchisees report to a new owner [who
immediately begins changing things] is probably more disruptive
than keeping the existing support structure in place.
How long does the transition usually take, to the point where
everything is running smoothly under the new ownership?
That's probably a function of how large the company is and
how much is changing beyond just the change in ownership. If a
franchise keeps its existing infrastructure, home office support
and so on, it can probably be done in 18 months to two years. If
everything were to change, it could take three to five years.
What can franchisees do to ensure this is done
successfully?
Embrace the change and try to work together with the new owners.
It really doesn't do anyone any good to work in the past and
wish the transaction hadn't occurred. The best thing is to move
on, embrace the change and try to make the franchise as successful
as possible going forward.