How to communicate about the transaction, whether or not to keep the seller on board for a while, why use the services of professional experts, what pitfalls to avoid…
The latest instalment in our series on taking over a franchise network answers the final questions you need to ask yourself to ensure a successful transfer.
Communicate rapidly about the takeover
When selling a franchise network, secrecy and confidentiality are paramount. Rumors must be avoided, and the sensitivities of stakeholders must be spared, to maintain confidence in the concept. It is therefore important to define a communication schedule for the operation that is adapted to each contact, especially franchisees.
“Communicating the sale of a network to franchisees remains a sensitive subject, a question of timing. The first problem is the consultation of employee representative bodies – a legal obligation – which can lead to leaks. Once the sale has been signed, it’s best to communicate quickly with franchisees, to avoid creating mistrust, and to show transparency about the operation.
When communication around a network transfer is poorly managed, franchisees feel like “value-adding elements” in the operation. What’s more, if the buyer is an investment fund, there are even more concerns to defuse,” warns Sandrine Richard, a partner at Simon Associés.
Emphasize the positive effects of the sale
Monique Ben Soussen, founder of BSM Avocats, is equally convinced that, to ensure a successful transfer, “you need to organize real communication with franchisees, convincing them of the opportunity of the operation. The sale should be announced at formal meetings, with a presentation of the buyer, his project and his new teams. For example, at an exceptional national convention.
The buyer needs to know how to take the time to reassure people about the content of future services, and even improve them based on suggestions from franchisees. Membership begins with the new franchisor. Establishing a certain degree of transparency doesn’t give you the feeling of being let down by the seller.
Unfortunately, until everything has been finalized, the seller is reluctant to give this information, and so informs the network rather late. To make a success of the transaction, the seller and buyer of the franchise network must act together, the former having to present the latter to the franchisees, with an action plan insisting on the positive effects of the transfer, and making a real effort on the brand’s communication”.
Showing that the network is in good hands
“If the owner of the network has a strong role in federations, he can remain active on these issues within the network. Sometimes, he remains as a moral guarantor on a board of directors, or at the head of a foundation linked to the brand. But in my opinion, he can’t accompany the buyer for several months, as he can in the case of a point-of-sale takeover. This is the best possible confidence-building measure: to leave immediately, i.e. to show immediately that the network is in good hands. Because to stay is indirectly to say that the former manager is irreplaceable”, stresses Olivier Mignot, partner at Franchise Management.
SWOT, dialogue and mindset
There are several keys to success when taking over a franchise network. “First of all, a good self-analysis for the buyer. Before looking for know-how, you need to look for interpersonal skills. Transferring a business is above all taking over men and women. Some profiles are better suited to start-ups, others to takeovers. Carrying out a SWOT analysis – strengths/weaknesses, threats/opportunities – and getting support in managing the acquired network – from a coach or an integrated manager – is recommended.
Secondly, the buyer needs to be aware that you can’t manage a network of salaried employees, i.e. a branch network, in the same way as you manage self-employed people. Dialogue is always preferable to an overly directive attitude. It’s also essential to know how to analyze the franchisor’s business model, or to enlist the help of others, for example to understand the use of royalties or the impact of back margins.
As far as digital technology is concerned, it’s a must, particularly in terms of relations with franchisees, if only through the automatic feedback of real-time dashboards. It is therefore essential to check whether the solutions used by the retailer and its outlets are up to date or obsolete.
Finally, the mindset of franchisees is fundamental. In the case of a network takeover, franchise contracts may be terminated, and 10% of sales outlets may evaporate. Naturally, a change in network leadership can also facilitate the arrival of new entrants,” explains Benoît Fougerais, co-founder and managing director of Pretpro.fr, a network of independent experts in professional financing solutions.
Transferor: accept the consequences in terms of sale price
When taking over a franchise network, transparency is all the more imperative as the franchisees are the first to be affected by the operation. “In his dealings with the buyer, the seller must be transparent, at the risk of devaluing the purchase price or triggering a negotiation, rather than risking the eventual activation of the asset/liability guarantee. The future of franchisees is at stake. If things are imperfect, it’s best to be transparent and accept the consequences in terms of selling price. Franchising remains a contract of trust, and this should be reflected when negotiating the transfer of a network.
On the transferee’s side, it must record the structuring statements made by the transferor. Example: things that cannot be observed in a legal audit, such as limited or prevented pricing freedom, or the quality of animation. The transferee must be able to anticipate any costs that may be incurred in correcting the problem.
What’s more, he rarely meets the franchisees before the firm and definitive acquisition, so he hasn’t taken the temperature of the network, and can’t know how the seller was perceived by his independents. There’s nothing to stop him from making a mystery visit to one of the company’s outlets, or talking anonymously with franchisees,” points out Sandrine Richard, a partner in the law firm Simon Associés.
Don’t underestimate the psychological dimension of a sale, or the culture of the network.
Two traps are particularly common. “The first trap to avoid in a network takeover is believing everything it says! It’s important to check that the concept’s promise matches its concrete effects. A counter-investigation in the field is necessary to verify the operational reality, and not just buy on parts.
Second element: underestimating the psychological dimension of a transfer and the culture of the network. The franchise contract remains a fixed-term contract with no precariousness bonus. Franchisees will inevitably wonder whether the new franchisor wants to renew their lease with the brand, and sometimes take a defensive stance. This can lead to irrational behavior.
That’s why it’s advisable for the buyer to go out into the field as a ‘mystery shopper’, and ask to take part in a national convention, so as to get a feel for the terrain,” points out Olivier Mignot, expert and partner at Franchise Management.
Future success will be built on people
To support the takeover of a network, experts – who should be chosen for their experience in franchising – should be considered as a value, not as a cost, in an operation that is always complex, and in which they help to reduce the risk of failure.
“As franchise experts, our job is to support the transfer of a network in terms of its human dimension. Of course, it’s essential to buy a network at the right price, but future success will be built on people.
If we analyze the DIP and the contract with regard to operational reality, we carry out a “Network Performance Diagnosis” based on 400 control points. It’s an MRI that measures the maturity of a network, identifying what it lacks, and how much it will cost to fill the gap. We provide a benchmark against the 400 franchisor customers our firm has been serving for over thirty years,” says Olivier Mignot.
On the investment side, Benoît Fougerais, co-founder and managing director of Pretpro.fr, handles between 250 and 300 financing applications for all types of company every month, 30% of which are takeovers. “Our role is to facilitate the process of obtaining financing, with over a hundred solutions to choose from, ranging from traditional banking networks to leasing and participative financing. Today, we adapt these solutions to the project, rather than the other way round, as soon as there is a value proposition,” he explains.
On the accountancy side, the challenge is also to look to the future, well before the actual handover. “Every business owner creates value and wealth, which is intended to be passed on. They need to prepare themselves fiscally and legally, several years before they are ready to sell. When you start thinking about selling your network, it’s essential to enlist the help of professionals. It’s also enriching to be able to talk to managers who have already sold or taken over, to share their experience”, suggests Stéphanie Cinato di Fusco, National Director of the Franchising & Organized Trade Market at the In Extenso Group.
Anticipate potential network weaknesses and vulnerabilities
Finally, the legal aspect remains central to the act of transmission. “The takeover of a network is a structuring operation that involves the future of many people, both franchisees and the company’s employees. A lawyer can help you understand how it works and its consequences, anticipate any weaknesses or flaws in the network, and draw on his or her expertise – in both corporate law and franchising – to make the transaction a success”, asserts Sandrine Richard, a partner at Simon Associés (on the franchisors’ side).
“Relying on a lawyer who specializes in defending franchisees can help you determine whether the franchise contract has been maintained in its original terms, or whether there are more or less open attempts to modify contractual relations or supply arrangements. We need to be particularly vigilant when it comes to suppliers, as a change of supplier can have a direct impact on franchisee profitability”, adds Monique Ben Soussen, founder of BSM Avocats (on the franchisee side).
