Why Companies Neglect Vetting Franchisee Opinions In Pre Acquisition Due Diligence
I have been on all three sides of franchise system acquisitions. Only once was I able, through aggression, to blow an acquisition out of the water – actually it was a leveraged management buy out and I blew up the financing on behalf of my franchisee clients who objected to an agenda that management was determined to pursue. I always wondered why it was that acquiring companies seemed not to give a tinker’s damn about franchisee attitudes, concerns and aspirations when vetting these acquisitions.
I think I now understand it better, and I’ll share this with you in the hope of instigating a dialogue about the subject. I am not suggesting that any acquirer vet for franchisee morale by any touchy, feely dialogue with franchisees pre closing. The reason for that is that I think that the current vetting techniques work just fine in almost every instance, and that it may be wise not to open a floodgate for the attempted imposition of franchisee agendas that, if given free rein, could be pernicious to a franchisor’s legitimate interests.
The three most important questions in acquiring a franchise system are its financial performance history; whether the brand and the substance of what the franchise has to offer have potential continued longevity considering market conditions and trends; and the strength of its portfolio of enforceable franchise contracts, measured by the consistency of the agreements over the history – their net compatibility – and the dispute resolution track record if any.
In its financial performance history one looks not only at cash flow, but also at the quality of the financial performance of its franchisees in terms of their reasonably prompt payment of what is due. If the footnotes to the financial statements show large, old receivables from franchisees, the value of a potential acquisition diminishes greatly. Disciplined franchise systems are valuable for that discipline. Full article.
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