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Problems when franchisor is acquired by investment bankers

Bundy & Fichter PLLC May 10, 2023

Wall Street has discovered franchising. The franchisee lawyers at Bundy & Fichter PLLC see the impact regularly. Sometimes we can spot the risk before you invest in the franchise. Sometimes it happens later. Either way, it can have dramatic and long-term consequences to the franchise relationship and to the franchisee’s ability to realize what they expected from the investment.

When a franchisor is acquired by an investment banker or investment firm, several potential issues may arise for both the franchisor and the franchisees. Not all acquisitions lead to problems, but it's good to be aware of potential issues. Here are some concerns that may come up:

  1. Changes in management and strategic direction: The acquisition may lead to a shift in the strategic direction or management style of the franchisor, which can have a direct impact on franchisees. New leadership may not understand the franchise model, may prioritize short-term profits, or lack the same level of commitment to the franchise's growth.

  2. Cost-cutting measures: Investment firms often focus on improving profitability, which can result in cost-cutting measures that may adversely affect the franchisees. These might include reduced support, lower quality products, or changes to vendor relationships. They may only provide the services and support they are absolutely required to provide under the franchise agreement. That may not be much.

  3. Financial pressure: Investment firms typically expect a return on their investment, which can put financial pressure on the franchisor to increase revenue or cut costs. This could result in higher franchise fees, increased royalty rates, or a reduction in services provided to franchisees.

  4. Communication breakdown: With new ownership, there might be changes in the communication channels between the franchisor and franchisees, leading to a decrease in transparency, responsiveness, or clarity.

  5. Loss of company culture: The acquisition may lead to changes in the franchisor's company culture, which can impact franchisees' satisfaction and connection to the brand.

  6. Focus on short-term gains: Investment firms may prioritize short-term financial gains over long-term growth and stability, which can result in decisions that negatively affect the franchise system.

  7. Potential for franchisor's insolvency: If the investment firm's strategy fails or if the firm becomes financially unstable, the franchisor may be at risk of insolvency, which would have a significant impact on the franchisees.

  8. Brand reputation: If the acquisition is perceived negatively by customers or the public, it could tarnish the brand's reputation, affecting the franchisees' ability to attract and retain customers.

  9. Legal and contractual issues: The acquisition may lead to changes in the franchise agreement or other legal matters, which can create uncertainty and potential disputes between the franchisor and franchisees.

  10. Sale or spin-off: Investment bankers may decide to sell the franchisor or spin off certain divisions or assets to recoup their investment, leading to further disruptions and uncertainties for the franchisees.

Many franchise agreements place no limits on a franchisor’s right to sell any part of the franchisor to anyone, including to investment bankers. However, the law may impose some restraints if the transaction would have the effect of depriving the franchisee of what they reasonably expected from their investment. The franchise lawyers at Bundy & Fichter PLLC in Seattle, Washington, would be happy to discuss how the law might apply to you.

To mitigate these potential problems, franchisees should stay informed about the acquisition from the first rumor and remain alert to any changes it brings. The franchisee or prospective franchisee should discuss the situation with an experienced franchise attorney as soon as the risk appears. Bundy & Fichter would be happy to hear from you and to discuss your possible options with you. If you are considering investing in a franchise the risks of an acquisition of the franchisor by investment bankers is an important topic to address with your franchisee lawyer.