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Changing Hands

Your franchise company just got sold. Is it time to panic?

Of the many different reasons why franchises are acquired, the one that seems to come up most often is that the entrepreneur who founded the business is simply ready to move into something else, according to Brian Cole, senior attorney with the Los Angeles-based law firm of Jenkens & Gilchrist LLP. And considering a franchise's founder can't stick around forever, the possibility that your franchise will someday be acquired is real. "Almost every franchise business will eventually be up for sale at some point in its life," Cole says.

If the founder leaves and new owners come in, does that spell the end of your close-knit system...or even your business? Franchise Zone spoke with Cole, who worked for 15 years in Pizza Hut's franchise division, about exactly what happens when a franchise is acquired and how this process can go smoothly for everyone involved.

Franchise Zone: At what point in the acquisition process should franchisees be informed about the sale?

Brian Cole: Generally not until after a definitive agreement has been signed for the sale. At that point, whether the business will be sold or not is more than mere speculation. Often parties talk about doing a transaction and won't go forward with it, typically because the parties can't agree on the price or the buyer can't obtain the financing. Making an announcement about a sale before there's a definitive agreement is difficult because there's a chance it may not occur.

What could happen if the announcement is made too soon?

There's always a risk that it will be difficult to make franchise sales in that period, and there's an increased chance of franchises losing employees due to uncertainty. It's also more difficult to get financing when the lenders think current ownership doesn't have a long-term commitment to the business.

What kind of input should franchisees have in the possible sale of their franchise company?

Generally, the ownership of the franchisor is not something franchisees have a right to expect to influence. They have contractual rights with the franchisor that won't be affected by the sale, but they can't expect to change the outcome of the sale process, except in those instances where they're interested in buying it themselves.

Are there any signs that would tell franchisees their franchise may be up for sale?

One obvious sign would be if something happens to the founder of the company; an accident or illness or death could obviously cause the business to be up for sale. A less dramatic sign would be if the business is drifting and no one seems to be paying attention to it. That may indicate that the franchisor is focusing more on selling the business than on the business itself, or it may simply indicate that the owner of the business has lost interest, in which case a sale may be the best thing the franchisees could wish for.

Are changes ever made to the concept as far as d├ęcor, name, things like that?

Those kinds of changes have been reported. But more often, when a business is sold, it continues to be operated as it was prior to the sale, just under new ownership.

What can the franchisor do to make an acquisition proceed more smoothly for everybody involved: franchisees, seller and buyer?

One of the important things franchisors can do is to communicate. This may be affected by securities laws, but as soon as it's possible to communicate to the employees and to the franchisees about what's going to happen and what the plans are for the business, the better off the franchise is. One of the risks in any transaction is the uncertainty-people not knowing what the future holds-so the sooner they know what the plans are, the better.

How much should franchisees be told?

Once the transaction has been publicly announced, they should be told as much as the company feels comfortable making public, because franchisors can't assume the franchisees will maintain confidentiality. But in terms of the general plans for the business-anything going on that's going to be disclosed publicly anyway-it would be good for the franchisor to let the franchisees know.

Should franchisees be told before announcements are made to the general public?

If the franchise is a publicly traded company, it runs the risk of violating the securities laws if the franchisor does that. If neither the company being bought nor sold is publicly traded, it may be wise to tell them a short time before the announcement is made publicly.

In your experience, when these transfers are made, does it benefit the business more than it hurts it?

In the long run, it does. Franchisees often regret the change, particularly when they go from being a small privately held company to being owned by a public company. They miss the closeness. But on the whole, the transactions tend to benefit everyone, franchisee and franchisor alike.

As far as the culture change goes, what can the buyer do to make this an easier transition for the franchisees? Should they try to replicate the old culture, or do the franchisees just have to get used to being part of the new culture?

That varies. Certainly in some instances people try to impose a new culture on the company that's acquired, and often that ends up causing more problems than it solves because of the clash. It's often better if the buyer allows the acquired company, particularly if it's a relatively large and established company, to retain its own culture instead of trying to change everything. Having the franchisees report to a new owner [who immediately begins changing things] is probably more disruptive than keeping the existing support structure in place.

How long does the transition usually take, to the point where everything is running smoothly under the new ownership?

That's probably a function of how large the company is and how much is changing beyond just the change in ownership. If a franchise keeps its existing infrastructure, home office support and so on, it can probably be done in 18 months to two years. If everything were to change, it could take three to five years.

What can franchisees do to ensure this is done successfully?

Embrace the change and try to work together with the new owners. It really doesn't do anyone any good to work in the past and wish the transaction hadn't occurred. The best thing is to move on, embrace the change and try to make the franchise as successful as possible going forward.

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