Franchise Q&A [Bio] Natalia Lewis is an associate at Hamilton Pratt [Bio] Derrick Simpson is managing director of Franchise Resales
Q
What would happen if things were to change
significantly during the period of the franchise agreement? Under what circumstances would I have to sign something new?
A. As a rule, once the parties enter into a franchise agreement, subject to the limited exceptions outlined below, the terms can only be amended if all parties agree. Whilst a franchisor can introduce changes to the operational aspects of its system by amending the operations manual, it cannot make fundamental changes without the franchisee’s consent. Generally, of course, there should not be a significant change to the system! If, on the other hand, the franchisee changes its business structure and incorporates a limited company instead of trading as a sole trader or in a partnership, or if a business partner wishes to leave or a new business partner wishes to join the business, then these types of changes will need to be documented and the franchisee will be required to sign appropriate additional documentation, which would usually include a new franchise agreement. If the law changes so that the terms of the original franchise agreement, if left unamended, would be invalid or unenforceable, then a franchisor needs to have the right to amend the offending provisions to make it legally compliant. Generally, there is a clause in the franchise agreement that sets out the procedure to enable this to happen.
Q
Why do resales seem to cost more than a
new franchise of the same brand?
A. Resales of existing franchises can be more expensive than new-start franchises (though this is not always the case) and the reason for a higher price is because the value of a resale is based on the historic trading profitability of the business, whereas the price of a new franchise is set by the franchisor based on their training and set-up costs. That said, the difference in total cash
requirement for a resale over a new start may not be that different in many cases. This is because new start businesses will usually require a larger amount of working capital than a franchise resale to support and feed the business as it grows. Plus, additional cash will be required to provide an income for the buyer whilst the business develops to a position of profit – enabling drawings to be taken. With a franchise resale there is cash flowing through the business from day one so, whilst the initial price to be paid may be higher than a new start, when compared side by side a franchise resale may be the better option because it is already trading and therefore may be thought of as more secure than a new start in a greenfield location. Because it is already trading, the franchise resale has brand presence in the local marketplace with clients already transacting with the business. More and more people are investigating franchise resales for these very reasons and they all point to greater security of investment, therefore making the higher investment level of a franchise resale a worthwhile option.
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Businessfranchise.com | February 2014
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