Sales process and protocol: Business acquisition in a franchise
How often does it happen that a franchisee approaches their franchise organization with the sudden announcement that they want to stop? Often, this franchisee does not know what to do next. Does the franchisor arrange for a takeover candidate? Do they have to take care of it themselves? However, they do know that it needs to happen quickly now that they've made the decision.
Mentally, they already have one foot out the door. On the other hand, sometimes the franchisee already has a buyer and the price has been agreed upon. Will the organization approve the entrepreneur? And this is despite the fact that there is a contractual obligation to offer to the franchisor.
A franchisee may only experience a sale once in their life. Often, the franchisee entered the franchise formula because of their passion, not due to their business, legal, and fiscal knowledge about entrepreneurship. But at some point, they do reach a blockade. Company transfer is a delicate matter and requires ample preparation. In a franchise, there are additional points of attention, if only because, in addition to the seller and buyer, a third party, the franchisor, is also involved. All parties must be able to prepare themselves. An acquisition protocol in the manual is therefore a more than useful instrument.
The franchise agreement legally regulates when parties must inform each other at the latest if one of the parties does not wish to continue for another period. It often also dictates how to act in the event of interim termination or transfer. However, it usually does not outline how the process will proceed and what the mutual responsibilities are in that process.
Transfer process
The provisions in the franchise agreement generally provide insufficient guidance. A lot is involved; think of the emotional aspects for the entrepreneur (and their staff), the transfer process itself, and the business and fiscal aspects. From the announcement of the impending departure, the interests of the franchisee and the franchisor become less naturally aligned; the franchisor primarily benefits from a responsible continuation of a branch or business because the acquisition price is not too high and, if the franchisor does not wish to take back the branch themselves, there is a good takeover candidate. Meanwhile, a franchisee wants to maximize their proceeds and often wants to exit their franchise business as quickly as possible.
Therefore, the phasing of the sales process is outlined here in a nutshell. For simplicity, this writing will only address the basic form 'sale of activities from franchisee to a succeeding franchisee' unless explicitly stated otherwise.
Phase 1: Making the decision
Making the decision alone can lead to significant discussions, especially if a franchisor does not want to continue with the franchisee. It is often contractually determined that the announcement must be confirmed in writing to the other party. If a good acquisition protocol is established by the franchisor, with input and commitment from the franchisees' representation, an 'Intention Statement between the franchisor and franchisee for sale' can be drafted. Among other things, this divides tasks and costs at an individual level in the acquisition process. Much unnecessary noise and discussion can also be prevented by parties agreeing to conform to a commonly determined methodology for valuing a franchise business or activity. The selling franchisee may, in principle, as an independent entrepreneur, determine the asking and selling price themselves, but it provides peace of mind for the potential buyer and the franchisor if this is done in accordance with a methodology determined with the collective franchisees. Once this hurdle is overcome, the announcement to staff (and to customers) follows.
Phase 2: announcement of the company transfer
This step is sometimes postponed due to the unrest it can cause. But this is not always possible in connection with finding a successor.
Phase 3: finding a successor
This often requires active recruitment (if the franchisee does not come or is not allowed to come from among the other franchisees). Keeping the process under the radar is often not possible due to the research phase (and the due diligence) of the potential buyer.
Phase 4: research phase of the potential buyer
In addition to verifying the hard data, the potential buyer wants to feel and experience what they are purchasing, possibly through a conversation with the (assistant) manager. Often, the first step within this phase is drafting an intention to buy and sell statement. This is a precursor to the transfer agreement between the buyer and seller. It is highly desirable in this phase that the candidate franchisee forms a good picture of financing feasibility and the financial and tax consequences before the final price negotiations take place. As the last part of this research phase, the candidate franchisee submits a business plan so that the financier (and possibly the franchisor) knows that a responsible takeover is intended and the franchisee can also be accepted by the franchisor because their profile 'fits' the franchise formula.
Phase 5: making agreements
In this phase, the reached agreement is converted into a written contract, with or without a financing condition. If a model agreement is available in the franchise manual, all involved parties can trust that matters are arranged legally responsibly.
Phase 6: buyer's financing
Subsequently, it is up to the buyer to finalize the financing. Independently or, if applicable, within the franchisor’s financing arrangement. It is good if the franchisor also has a vision regarding the desirability of a piece of financing by the selling franchisee so that this process can be guided well.
Phase 7: transfer
Ultimately, in phase 7, the actual transfer takes place, often after training the new franchisee on-site.
Most franchise agreements include a termination notice period of six months to a year. Even if the above phasing or step-by-step plan is followed, the franchisee and franchisor will have their hands full realizing this within the given period. It’s better to be prepared; it saves a lot of headaches…
Tips
Commitment to how the valuation should take place (acquisition price) promotes a smooth acquisition and prevents disappointments, delays, or failed negotiations among franchisees.
If you don’t have an acquisition protocol yet, get started on it. Create this in consultation with the franchisees’ representation.
Then include the protocol, including model agreements and 'countdown,’ i.e., checklist in appendices, in the franchise manual. This gives it an embraced and binding character, as desired by the franchise agreement.
In sole proprietorships, in concepts focused on personal services and for the Healthcare sector, additional phases can be identified. This is due to, for example, the personal service to the healthcare consumer and the consent often required to transfer personal confidential information and services to the new entrepreneur.
Do you need support with one of the protocol components or with the creation of a transfer protocol in concrete takeover situations? Koelewijn & Partners are happy to assist you with this. Get in touch via the form!