International Law

Risky Business: When your Franchisor Transforms

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The average life of a corporation is 12 years.

But the death of a corporation doesn't mean it became bankrupt - a number of other ends are possible, change of control, merger, amalgamation, spin-off of divisions.

In the WSJ, September 23, 2008, it was written:

"About the last thing someone thinks about when buying a franchised business is what happens if the franchiser declares bankruptcy.

But in this dicey economy, it is wise for both current and would-be franchisees to prepare for such a possibility."

The dicey economy has nothing to do with with planning for a change of control: if your franchise agreement is more than ten years, and your franchisor is over five years old, then you have got a good chance that your franchisor is going to endure a change of control. Notably, franchise agreements play no constraints on the franchisor's change of control but are very tight on a franchisee selling their control

So what can you do?

Les Stewart, writing at the Franchise Fool, has an interesting suggestion about protecting yourself from franchisor change of control.

"Only invest in a franchise that has an IndFA with the following 3 characteristics: a "rainy day" account of a minimum of $25,000 to take immediate legal action, a two-year track record of collecting monthly fees from 75% of the franchisee members (you do not buy house insurance as the first responders are driving up to your curb), and 50% plus 1 of those contributing franchisees have signed an agreement that they will contribute (loan, add equity) over-and-above the monthly commitment when asked."

Full post as published by Misleading Advertising Law on October 03, 2008 (boomark / email).