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End of a love affair: when franchise partnerships fall apart

Written by Eric Johansson on Thursday, 08 September 2016. Posted in Analysis

Just like the end of a marriage, when a partnership between franchisees falls apart it can be emotionally and financially exhausting. But there are ways to limit the fallout

End of a love affair: when franchise partnerships fall apart

Given the daunting responsibilities of running a business, it’s hardly surprising  many first-time franchisees start out with a partner. But while having someone to bounce ideas off is comforting, it could lead to troubles down the line. “People say that partnerships are sinking ships for a reason,” says Carl Reader, affiliate forum chairman at the bfa, director of Selling a Franchise – the franchise purchasing website – and author of The Franchising Handbook.

When a partnership between two franchisees sharing a business falls apart, it could have potentially costly ramifications for the business. But provided the right precautions have been made, a franchisee can easily avoid such a rift swallowing their business whole. One such safeguard is to sign a partnership or shareholders’ agreement when you buy a franchise with someone.

These agreements outline how profits are shared, as well as what to do in the event the partners decide to go their separate ways. “They’re like prenups,” says Reader. For instance,they should delineate how to calculate how much the company is worth and lay out the process should one party leave the company or want to buy out their partner. “I strongly recommend you have that in place from day one when people are still friendly and talking to each other,” concludes Reader. “Otherwise the only people profiting will be your lawyers.”

The house of pain

At first glance, the relationship between Julie Davis and her business partner looked like a match made in heaven. Given both of them had
experience of the lettings industry, buying Belvoir Colchester seemed like a no-brainer. “We felt that we could rely on each other,” says Davis.However, the duo forgot one important thing when they bought into the property franchise: establishing a partnership agreement. “We naively didn’t sign one,” says Davis.

That mistake would come back to haunt them, as the difference in both their visions for the business and the effort they were willing to invest became clear. Initially Davis attempted to gently hint to her partner that they both needed to put 100% into the business for it to be fair. “But nothing happened,” she says. “I couldn’t carry on like that.” Davis decided that she wanted to stage a buyout but the situation quickly turned hostile, as her partner revealed she had no intention of leaving the company.

In lieu of a partnership agreement detailing how the business should be split, Belvoir made each partner come up with an idea of where they wanted to take the business. “In the end, they decided to go with my plan,” says Davis, who took control of the company in November 2014.

However, while she had control of the company, she didn’t yet own it. The partners still had to settle the question of how to set the price for a buyout. “An agreement could have helped by saying an independent arbitrator should value the business and set the price,” says Reader.

Instead, to set the price of the buyout, Davis and her partner approached their own accountancy firm and resale broker to separately value the company. The two firms ended up coming up with different prices and, while Davis could have insisted to buy out her partner for the lower figure, she didn’t. “That’s the price I’d expect to get if it had been sold,” says Davis. “So I thought it was more fair.”

In light of this, Davis decided to take out a loan to help her afford the asking price. Initially the bank had some concerns, given she had sold her house and didn’t have any other security. However, it quickly changed its tune when it took a second look at the business’s results since Davis had taken control, prompting it to lend her the full amount.

That’s how in July this year, almost three years after the break-up process started, Davis found herself driving home from the bank, having finally bought out her partner. Spontaneously, she started to laugh. “My son asked me what was wrong and I told him that I couldn’t believe it,” she says. “It was over: I now owned the business and it was just fantastic.”

While the transaction made her the sole owner of Belvoir Colchester, it also proved to be the last nail in the coffin of her relationship with her partner. “I haven’t spoken with her in a long time and that is not going to change,” concludes Davis. “It’s a shame really but I hope it allowed her to open the next chapter in her life.”

About the Author

Eric Johansson

As acting web editor and resident Viking, Johansson ensures Elite Franchise is filled with engaging and eclectic entrepreneurial stories. While one of our most prolific franchise writers, he has sharpened his editorial teeth by writing about entertainment and fitness. Follow him on Twitter at @EricJohanssonLJ to catch up with his stream of consciousness.

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