What to Consider When Merging or Acquiring a Franchise

Franchisee Business

Merging, Acquisition, and the Franchise Agreement

The franchisor/franchisee business relationship is a common one, and it offers plenty of growth potential. Whether you’re considering owning a franchise or thinking about taking on franchisees, understanding the process before making a major decision is crucial. Then, it’s essential that you draft a franchise agreement that covers both the immediate terms, as well as any changes that may occur in the future. Maxwell Locke & Ritter can help you complete this when you’re ready, but here is what to know and understand before buying a franchise:

The Importance of an Agreement

As you embark on your business journey, you’re bound to run into new opportunities for growth and expansion. For example, if you decide you want to sell your franchise or merge with another business, you need to be sure that you legally have that option on the table. When you’ve drafted a legal agreement, you can avoid conflicts and struggles that may occur when ownership changes.

For example, when one franchise purchases another, it may want to make changes such as offering new products, taking a new approach to marketing, changing a name, or moving to new territories. Now, the conflict is whether or not they are legally allowed to make these drastic adjustments without seeking the permission of the previous owners.

Preparing for these types of issues before they occur just makes sense. That way everyone is on the same page, and you can avoid potential lawsuits based on common factors such as wrongful termination, forced changes, or a forced sale. Our CPAs can help develop a franchise agreement so both parties are aware of the expectations of sales or mergers.

Mergers and Acquisitions Considerations

Adhering to the terms will keep you out of legal trouble. Of course, when changes or adjustments are necessary, Maxwell Locke & Ritter can help. You should also consider the following:

  1. How long will negotiations take and when should certain milestones in the agreement processes be met?
  2. What are the renewal rights, if any?
  3. What are the terms and conditions of the involuntary termination of current employees?

Giving Just Cause for Changes

As we’ve mentioned, even if you do create a contract before proceeding, a contract may be able to be altered if there is just cause. This rule may vary depending on where you’re located, so you’d be wise to learn about local just cause procedures so you can be prepared for potential contract alterations.

Just cause requirements may be applicable to both terminations and non-renewals, and just cause can be interpreted in different ways, depending on the court/state.

Some courts may interpret this as a franchisor’s legitimate reasons, which is very broad. Other courts may interpret just cause more narrowly, viewing it as useless because a franchisor could simply claim a reasonable, believable business purpose for determination.

Entering Into a Covenant of Good Faith

Beyond just cause, some courts may also determine whether a covenant of good faith and fair dealing applies to the situation. In most courts, both parties’ justifiable expectations are taken into account. When completing a detailed franchise agreement, it’s prudent to learn about the other party’s expectations, as well as how they typically behave in a business setting.

The reason why this is important is that, if one party acts volatile or unreasonable, the court may side with the other party, which may result in them being excused from their legal obligations and, in some cases, even compensated. It’s smart to also consider these types of intangible factors that could cause issues in the future.

Necessary Terms and Provisions

Part of preparing an agreement is considering specific terms that relate to potential future mergers or acquisitions. Here are some common issues worth including:

  • The right to develop or purchase new products
  • The right to eliminate products (whether to simply make room for the new or to drop products that are not generating revenue)
  • The right to alter the trademark as part of the branding, especially when merging
  • The right to advertise products or services
  • The right to request a redecoration or remodeling, especially when there are standards across all franchise locations

In addition to including the terms above, part of your franchise agreement should include learning about any statutes in your state that could require a just cause to merge, acquire, or terminate the franchise, as well as whether or not your jurisdiction has an implied covenant of good faith. These issues are very complex, so contact Maxwell Locke & Ritter and let us help you navigate your business growth.

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