Your company’s founder has laid a solid foundation and the franchise business has grown to a point where economics dictate that the company must remain the same size or expand to establish a larger royalty base for profitability. If you choose the role of expansion, it could be accelerated through merger or acquisition of another franchise company. Your decision to expand may even be far removed from a financial one. It could be predicated on a product or service which is complimentary to your existing business or perhaps, another company has an excellent management team in place and you believe a merger or acquisition would help position your company as the dominant franchisor in a particular field.
Up to this point, the entire process of whether to engage in a merger or an acquisition of another company has been based upon various business decisions, all of which ultimately relate to profitability. And of course, profitability is extremely important, but you must not base a decision solely on profitability. This a good time in the decision process to call upon your franchise counsel to see if there are any legal implications before moving forward. If your decision process fails to include legal counsel as part of your merger or acquisition team, be forewarned your next step might be the defense of one or more lawsuits from franchisees in your own system.
If not handled properly, a good plaintiff’s attorney may craft a lawsuit against your company which includes breach of contract. He or she may contend that your merger or acquisition effectively created a complete modification of the Franchise Agreement, by revamping the franchise concept. They may even throw in a count for violation of the implied covenant of good faith and fair dealing based upon such issues as market expansion, encroachment, dual distribution and interference with contractual relations. Next comes one of their favorite counts, fraud. Plaintiff attorneys love to use the fraud count and if they can find a way to get the lawsuit tried in their own ballpark, “let the good times roll.” To add spice to the lawsuit, they might add a count for violation of state franchise relationship laws and franchise disclosure laws. For the icing on their lawsuit, they may even throw in an antitrust count by contending your company’s conduct and your co-conspirators’ conduct (that is, the conduct of the other company you are acquiring or with whom you are merging) is designed to eliminate their client and other similarly situated franchisees by saturation, or perhaps elimination of the market. If they are really feeling mean, they might go with a class action count or securities violation if one of the defendants is a public company. Their case for the franchisee looks pretty favorable, all because the franchisor didn’t establish a plan which included the legal aspects of merger and acquisition in the decision process. Fortunately legal consultation before making any decision on merging or acquiring another business can save you hundreds of thousands of dollars in legal fees alone.
A merger or acquisition may be very desirable, but it may also turn out to be a nightmare if you fail to make a proper legal plan.