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Big company takeovers can cause problems for franchisees and lead to disputes.

Updated: May 16, 2023

As franchising is a specialist area it is unlikely that the purchaser of a franchisor will come from

outside the industry. Conversely, there are a number of multi-brand franchisors who are at times highly acquisitive. Also, where the sale is by a national master licence holder of an international brand, the business is often bought back by the licensor who then controls it at long range. As a result, when a franchisor sells their business the purchaser will probably be a big company rather than an individual.

Some big company takeovers are successful, but many are not. This is particularly the case where a franchised business is involved, and it is generally the franchisees who experience most of the problems.

Takeover specialists in the franchising sector tend to fall into two groups. The multi-brand

franchisor, or venture capital. And when a franchised business changes hands it can easily end badly for the franchisees. This is because the vision and long-term commitment of the founder is replaced by a drive for short term profit and, if the acquirer is a quoted company, the resulting increase in the share price. Senior management tend to have remuneration packages that are based on profitability, and or, an increase in the share price. These are easy to quantify. Intangibles such as customer satisfaction are very difficult to assess. As a result, the focus of the business changes from long term to short term. A culture of ‘make the assets sweat’ starts to prevail. This is fine for the new owners and the managers but it is unlikely to add value or increase the earning power of the franchisees.

When new management becomes involved the process of ‘sweating the asset’ and ‘shaking up’ the company starts. Suppliers are squeezed, which, over time leads to a reduction in the quality of the products being purchased and the reliability of the supply chain. Both will adversely affect the franchisees who are dependent on the reliability and quality of the materials that they use or supply to their customers. The squeezing of suppliers sometimes involves a demand for a rebate or kick- back to the franchisor. This will not reduce the price to the customers or add more money for the franchisees, but it will have the same adverse effect on quality. The rebate works through to the bottom line and the managers hit their targets but there is no benefit for the customers or the franchisees.

New managers always need to impress. One way to do this is to win new business. One of the fastest ways to do that is to reduce prices. In an industry such as commercial cleaning, where the franchisor often negotiates national contracts with customers such as supermarkets and local authorities, this can be disastrous for the franchisees who organise the cleaning at local level. Cleaning staff become harder to recruit and retain and the franchisees work becomes more difficult and less profitable. The sales growth looks impressive but the damage to the franchisees takes time to manifest itself. And if some go out of business they can be replaced with new recruits. It must be emphasised that not all commercial cleaning franchises operate in this manner but some undoubtedly have done.

Aspiring franchisees almost always join for a combination of earning power and lifestyle. But if the franchisor receives a percentage of sales, as most do, sales growth is where the emphasis of a buyer of the business will be focussed. As the work/life balance and satisfaction levels of franchisees are almost impossible to quantify, that won’t be used as a metric for assessing management performance. Inevitably this leads to more work and a less satisfactory life-balance for the franchisees.

The original founder of a franchised business will have taken many years to build it up. He or she will know the franchisees personally and probably their families as well. Similar relationships will probably exist between the franchisees and the senior management: for as long as they stay. But managers and other staff are employees who can quite easily resign if changes in the company culture and ethos are not to their liking. Franchisees don’t have this flexibility and are locked in by their franchise agreements. On the expiry of the agreement there is almost always a right to renew but if the franchise is not as attractive as it was when they joined, this isn’t of much value.

None of this is intended to suggest that franchises that are controlled by big corporations are

unsatisfactory for franchisees. Far from it, some of the best franchises in the world are managed by huge corporates and have large numbers of multi-million pound value franchisees. It is simply to highlight the fact that when a major change, such as the buy-out of a franchise takes place, there will inevitably be some winners and some who do less well. If the change is the sale by a founder to a big company, history tells us that it is often the franchisees who are in the latter group.

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