Sometimes during a franchise relationship, the owner of the franchisor will change. When this happens, and you are unsure of what rights you have as a franchisee, you should seek legal advice from a franchise lawyer.
Change in ownership of the franchise happens for several reasons, including succession planning – one owner buying the interest of another – or all the owners selling to another business or individual. Sometimes, change in management occurs because the company enters into voluntary administration, as was the case recently with well-known franchisor Pie Face. Typically, however, ownership changes happen because 3rd parties buy out the franchisor(s).
It is fairly standard in franchise agreements for there to be a clause which gives the franchisor the right to change ownership without any consent requirement and at any stage during the franchise relationship.
Both current and prospective franchisees should discuss with their franchise lawyer the possible consequences that a change in franchisor ownership/control may have on the network of franchised outlets.
Possible consequences to franchisees
There are a number of things that franchisees should take into account if, and when, there is a change in ownership or control of their franchisor, including:
- The new ownership may offer less support, have a weaker reputation, or struggle to sustain the culture of the network;
- The new owners may have an interest in a competing business or similar franchise, which may make it more difficult to build up the franchise network;
- There may be less financial support as a result of the change in ownership, which may affect the level of support for marketing, training and recruitment spend;
- The new ownership may have a very different strategic plan for the future of the network, which may result in franchisees having less bargaining power;
- The franchise relationship and the procedures for dealing with breaches and other essential terms may be varied by new owners;
- There may be additional fees imposed on franchisees or further marketing spend on untested campaigns, which may come out of the franchisees’ pockets; and
- Any previously agreed arrangements between the franchisees and the ex-franchisor might be disregarded if those commitments were verbal and informal.
The conduct of new owners and the extent to which they can impose changes on current franchisees will depend on the terms of the individually negotiated franchise agreements. It is advisable to discuss any changes with a franchise lawyer to assess the rights of each party. An experienced franchise lawyer will look not only at the terms of the agreement but also at the conduct of the franchisor and whether they’re acting in good faith.
It is important to remember that it is not necessarily bad news when ownership changes. However, it is essential that you understand your rights and obligations in light of any changes. If you are unsure of how the change in ownership will effect you, and what benefits and risks may arise, you should get in touch with a franchise lawyer.
Process of ownership transfer
There are several circumstances under which an ownership transfer can happen, including the following:
- If the franchisor entity changes hands entirely i.e. new owners purchase the company;
- Through Sale of Business or Sale of Assets contractual arrangement whereby the franchise agreements are transferred;
- By establishing a master franchise agreement with the new master franchisee taking over some of the responsibilities of the previous franchisor(s); or
- The franchisor goes into administration and an external administrator is appointed to administer the franchise.
Stay tuned for part two of this two part series on what to do if your franchisor wants to sell the franchise. For immediate advice relating to franchise agreements or other ancillary documents contact LegalVision to get a fixed-fee quote for advice. Our franchise lawyers are ready to assist you at any stage of the franchise relationship.