In a recent case study, we discussed how purchasing a corporate (company-owned) unit from a franchisor can offer unique advantages – such as having one less party to deal with, because the seller and the franchisor are essentially the same. But it also demands a careful and strategic approach. Though this process is from the point of view of the buyer, many of the tips are reminiscent of an Insight about selling a franchise unit.
Let’s further explore the nuances of this type of acquisition and why buyers should consult an experienced NY franchise lawyer before making any offer.
1. Establish a Strong Relationship with the Franchisor
A buyer seeking to purchase a corporate-owned unit should demonstrate solid operational experience and financial stability. Initiating an open dialogue with the franchisor, seeking meetings, and building trust are essential steps. Additionally, highlighting a commitment to maintaining brand standards can help forge a productive relationship, because the franchisor will be monitoring the success of this unit.
Our recent experience representing the buyer of a corporate unit was unique because our client was already a customer of the location. If you find yourself in the same position, you can leverage the preexisting relationship to set the stage for open communication and mutual trust; it will be essential, as your ongoing partnership will be critical post-acquisition.
2. Review the Franchise Disclosure Document Thoroughly
Before buying a franchise, whether an existing unit or the right to develop a new unit, the prospective franchisee will receive a Franchise Disclosure Document (FDD). The FDD is required under federal and state law to enable franchisees to make informed decisions about whether to purchase the franchise.
The FDD is the primary source of information about the franchisor’s financial health, litigation history, and track record. Pay close attention to any discrepancies between the franchisor’s representations and the FDD, which is updated annually – typically within 120 days after the end of their fiscal year. Ask detailed questions about anything that raises concerns, and ensure that you fully understand the business model and associated risks.
3. Evaluate the Corporate Unit’s Performance
Not all corporate units are created equal. Analyze the unit’s financial statements, customer base, and operational history. Find out why the franchisor would sell – is it part of a growth strategy, or is the unit under-performing? Understanding the franchisor’s motivations will help you assess the opportunity and negotiate from a position of strength.
4. On Negotiation and Renewal Terms
Franchise agreements are included in the FDD as an exhibit and their review are equally important as the franchise agreement it is the contract which sets forth the terms that will govern the relationship between the franchisor and franchisee. While franchise agreements are typically weighted in the franchisor’s favor, there may be room for negotiation, especially when buying a corporate unit.
There may be less to negotiate in the purchase of an existing unit. But when negotiating, you should discuss with your NY franchise lawyer whether to focus on transfer and renewal terms. Clarify your rights regarding future transfers or renewals, and be aware that the franchisor often retains a right of first refusal in connection with a transfer. This means that if you ever decide to sell your franchise, the franchisor has the right to match any legitimate offer and purchase the unit themselves before you can sell to a third party. This provision is standard in most franchise agreements and can impact your long-term exit strategy.
5. Validate with Existing Franchisees and Staff
It is customary to leverage the information in FDD Item 20 to connect with others currently and previously in the franchise system. By speaking with these franchisees—especially those who have purchased existing units—you will likely receive pragmatic and honest information about the level of support provided by the franchisor.
6. Maintain a Collaborative Mindset
Franchising is a partnership. Approach negotiations with respect and a focus on mutual benefit. Be clear about your needs, but also be willing to listen to the franchisor’s perspective. A collaborative approach can lead to better terms and a stronger long-term relationship.
Strategic Planning with a NY Franchise Lawyer
Buying a corporate unit from a franchisor can be a smart investment, but it requires careful planning, thorough due diligence, and skilled negotiation. By building a strong relationship, reviewing the FDD, assessing the unit’s performance, and involving experienced advisors, you can position yourself for success.
An experienced NY franchise lawyer will help clients navigate these complexities and secure the best possible terms for their investment.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
