How to protect the long-term success of your franchise business
- A strong brand
- A business system you can replicate
- A network of franchisees running their own profitable businesses
Take a look back at the rest of David’s franchising series
A franchisee wants to sell their businessThe end goal for many successful entrepreneurs is to sell their business. This is their opportunity to cash in on all their hard work because they can often receive a lump sum payment that’s many times greater than their annual profit. For an entrepreneur who has started and grown their own business, it’s entirely their choice to whom they sell their business and on what terms. However, when a franchisee wants to sell their business it’s not that simple. As much as you may be delighted with how successful the franchisee has been, your priority will be the continued success of the business. Therefore, you will want to approve any prospective purchaser and place restrictions on who the franchisee can sell their business to. The franchise agreement and operations manual will usually contain details of these restrictions and any minimum criteria the prospective purchaser must meet. For example, you may set minimum standards relating to the prospective purchaser’s business experience and financial standing. You will also likely insist that they undertake (and pass) your training to ensure they know how to use your systems effectively. Alternatively, you may want to give yourself a right of first refusal to the buy the business of any franchisee who wants to sell.
The death or incapacity of a franchiseePart of my role as a solicitor is to raise the difficult what if? questions that nobody really wants to talk about. In my experience, addressing these issues before they occur usually leads to the best outcome for all involved. One of these situations is what happens if the franchisee dies or becomes so seriously ill that they can’t run the business? (When I refer to the franchisee in this situation Im assuming they’re a sole trader, but this is equally relevant if they’re the majority shareholder and managing director of a franchisee company.) This will be a difficult and emotional time for the franchisee’s family and it’s inevitable that without your intervention, the business will suffer. So, as supportive and sympathetic as you will be to their personal situation, in reality the best way you can help is to ensure that the business continues. To allow this to happen, the franchise agreement will usually contain ‘step in? rights (discussed further below) or the right for you to appoint a manager who can continue running the business. it’s also common for the franchise agreement to prevent the franchisee’s business from automatically transferring to a family member when the franchisee passes away. The reason for this is the same as when a franchisee wants to sell their business. You must ensure that someone suitable continues to run the business to protect the brand and system for everyone’s benefit. In reality, this is also best situation for the franchisee’s family. It maintains the value of the business until it can be sold and the executors of the deceased’s estate don’t have the additional burden of running it according to a strict system at a difficult and emotional time.
When you (the franchisor) needs to terminate the franchise agreementThe ultimate control you have over your franchisees is the right to terminate their franchise agreement. Their whole business is built on their entitlement to use your brand and system. When you terminate the franchise agreement, you’re removing this entitlement and as you can imagine, this could be disastrous for their business. So, when should you exercise this right? Clearly, it’s going to be a serious situation and the circumstances in which you can exercise this right should be clearly set out in your franchise agreement. For example, one of the attractive features of a franchise business is that it generates consistent results. When customers walk into any branch of a franchise business they know what to expect because all franchisees must follow the same proven system. If you have a franchisee who doesnt follow your system, their results will be inconsistent with the other franchisees. This will be disappointing for your customers because they will no longer receive what they’re expecting. Therefore, to protect the integrity of the system and the results it generates, you may exercise your right to terminate the franchise agreement if a franchisee fails to follow the system. __________________________________________________________________________________
Junk Hunters: From 160 in savings to a business franchising growth Handed an old tipper truck in lieu of a final salary, many would have despaired. Not Harsha Rathnayake, he saw an opportunity and set up Junk Hunters. __________________________________________________________________________________