At The Crossroads: To Merge, Acquire or Sell

You’ve built your franchise Company on a solid foundation and it has reached the first stage of success. Congratulations! You have reached the crossroads of growing the Company to the next level or selling it and obtaining the fruits of your labor. Either direction can be filled with potholes if you fail to plan ahead. Proper planning is accomplished by looking at the goals you initially set and determine where you want the Company to be in the next 3, 5 and 7 years. Your decision might be premised upon what capital and resources are needed for growth and what capital and resources are available. Are you looking for diversification, attempting to reduce the impact of a particular industry’s performance on the Company’s profitability? Perhaps your goal is to eliminate future competition, enabling your Company to gain a larger market share or increase supply-chain pricing power by buying out one of your supplier’s or distributor’s, thus reducing one level of cost in your profitability matrix. The decision on whether to grow may even be based on leadership. What are the strengths and weaknesses of your current management team?  Do you see a competitor with a management team in place that would fill in the gaps existing in your team? If so, it may make bottom line sense to acquire the other company in order to grow your business.  Maybe your decision is predicated on a complimentary product or service line which has synergy with those lines in your Company. By combining business lines or activity, performance at your Company will increase and costs will decrease. 

Whatever the motivating factor, without growing your Company you have only one road left to choose – the sale of your Company. Not a bad choice, and many Franchisors travel this road. To obtain the best possible price for your franchise Company, you must first do your due diligence to see if your Company is ready to sell. Due diligence requires preparation to present the best picture of a company that is organized and has each business system in place to enable a purchaser to succeed. Each of the following areas should be addressed to assure a prospective purchaser that the acquisition of your Company will lead to their success. 

  1. Make sure your Company has copies of all FDDs, UFOCs or other Disclosure Documents from the date of each Franchise Agreement. Catalog all FDDs, UFOCs or other Disclosure Documents from franchise registrations for each of your FDDs or UFOCs.  Do you have all required Transfer Agreements or Renewals for expired Agreements?
  2. Audit franchise files for proper execution of all agreements, including signed FDD and UFOC Receipt Pages.
  3. Focus on resolving compliance issues with your Franchisees. Are all royalty payments up to date? Do you have all of the ACH-Payment Agreements in place? Are Franchisees in compliance with required sales or have Area Developers completed required development schedules? If you have under-reporting or non-reporting Franchisees, make sure you have a plan in place to bring them current or establish an exit strategy when necessary.
  4. List those employees who are critical to your transition process and then establish a plan for keeping those employees in place.
  5. Determine which Franchisees have Addendums and chart any inconsistencies in your documents. It is always better to point out inconsistencies up front and explain why they are in place than to have a prospective purchaser discover inconsistencies while they are doing their due diligence.
  6. Finally, make sure you terminate Franchise Agreements with closed units or Area Development Agreements with territories that have not been developed according to the required schedule.

CONCLUSION

Whether merging with another franchise company, acquiring an existing business or preparing for the sale of your Company, don’t wait to get your franchise attorney involved in your decision.  Without the involvement of your franchise counsel, the best laid plans for success may result in a lawsuit from your own Franchisees or from the Franchisees of the other company seeking to enjoin the transaction.  Plan ahead.  Don’t wait!  Start the process of getting your Company ready now.  Put the proper systems in place straightaway and your decision at the crossroads will be like a super highway leading to success rather than the next wreck on a two lane road.

If you are a franchisor wondering if you should merge, acquire or sell, feel free to reach out to us at 205.408.3025 or email info@DuellLaw.com.

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