There is enough advice out there for franchisors to fill many books. But we have a few hints from another perspective. Our corporate department at Drumm Law often gets called in to help franchisor clients sell their business, and this is when many of the franchisors’ weaknesses really come to light. We’ve compiled a list below of best practices for franchisors from the corporate attorneys perspective.
1) Don’t forget to educate your sales team (both internal and external).
*During the negotiation for the sale of franchisors, old oopsies from the sales team can cause the buyer to ask for a reduction in purchase price (sales process oopsies = higher risk for buyer) or even derail the proposed deal altogether.
*Franchising is a very litigious area, and franchisors get sued pretty regularly. If you (franchisor) make a mistake in the sales process (improper disclosure, insufficient waiting time, etc), your business has far more risk for the buyer, and that’s going to be costly for you.
*Solution: make sure you are educating everyone on your sales team about the regulations. Have processes in place, have your attorneys provide training, etc.
2) Be discriminating.
*All franchisors go through periods of time when they just really need to bring franchisees in the system. It’s tempting to accept any prospect who is interested. But keep in mind, you’re not considering dating this prospect. You’re considering marriage (ie, joining as franchisor and franchise).
*Solution: really make sure that your prospect is the right one: do they meet your financial, experience needs? Will you be able to work with this person? And be willing to reject prospects who are not the right fit. This will save you so much pain and suffering (and cold hard cash) in the long run.
*When I am working through the due diligence process of selling a franchisor, this comes up a lot. There are several (or even just one) problem franchisees: my client will have lost money on the franchisees during the franchise agreement. And then to make things worse, when my client tries to sell the system, the buyer wants reassurances about the problem franchisees. I’ve seen deals where the buyer only agrees to buy the franchisor if my seller-client takes all future monetary risk for the problem franchisees (the problem that never ends).
3) Details really do matter. Don’t forget to double check your documents just one more time; Keep good files.
*During normal operations, life gets busy, and it’s hard to attend to all the details. You may not read closely through your franchise agreement or addendum, or you may not keep files of all correspondence with your franchisee. It doesn’t seem like it will matter at the time, but these lapses can and likely will come back to haunt you at some time.
*If you do end up with a problem franchisee, you need to have access to these files. And when you sell your business, the buyer will want to see every document and correspondence.
*Solution: Hire one good person who is in charge of all of these details. This person will double check all agreements to be signed (do you have the correct name of the franchisee, all owners listed? Territory correctly described and not overlapping another territory?). This person will be in charge of maintaining a good consistent filing system. If you aren’t able to handle the filing system on your own, buy a software system to help you out.
4) Spend time getting to know your franchisees.
*I hesitate including this one because it’s so obvious. But it is a mistake I see over and over again. By and large, my franchisor clients are in their businesses out of passion, and they love sharing the business with their franchisees. But the mistake I see is when my franchisor-clients don’t spend time getting to know their franchisees and establishing that connection.
*Solution: the more you can establish a connection with your franchisees, the less likely you are to have disputes (which are time consuming, costly, and make your business less attractive to buyers). Hire team members that work well with people, and make sure the franchisees see the support you are providing and not just the policing.
5) Have compassion, but make sure to be consistent.
*We are called in often to help a franchisor create a strategy when their franchisee has gone off the straight and narrow. Sometimes the franchisee is going through a divorce, or has a death in the family or a health problem. Our franchisors want to provide support, but that can be tricky. Because if you offer a benefit to one franchisee, you have to assume that all other franchisees will find out about it. (For example, if you offer a benefit to a California prospect, keep in mind that all other prospects will receive a summary of the benefit you provided to the first prospect.)
*Solution: anytime you offer a benefit to one person (whether it is to a prospect or an existing franchisee), think through this option on a system-wide scale. Would you be willing to offer it to other franchisees? Other prospects? For example, if a franchisee is going through a health problem, you may want to offer management support or one on one support instead of a royalty waiver. And make sure that you would treat all franchisees in a similar position in the same consistent manner.
If you have any questions, always feel free to contact us here.