Endgame: What happens to franchisees when franchisors leave the network?

It's common for startup entrepreneurs to build an empire then move on to do it all over again. But what about in franchising - if a franchisor departs, where does this leave the franchisees that bought into the model?

Endgame: What happens to franchisees when franchisors leave the network?

The startup world and franchise industry are similar in many ways but different in others. While entrepreneurs in each sector will both look to grow their enterprises and achieve scale, there will ultimately be varying approaches and agendas along the way. None more so than how they opt to exit their business.

Take Debbie Wosskow, founder of home exchange business Love Home Swap, for example. Inspired by Hollywood film The Holiday when starting up in 2011, she eventually sold Love Home Swap some six years later to RCI, a subsidiary of Travelodge parent Wyndham Worldwide, for a tidy $53m. By that time she’d already launched AllBright, the network for female leaders.”

Having exit strategies is simply the norm for startup entrepreneurs but it’s somewhat different for franchisors. Not only do they have employees to consider in the event of a departure, a franchisor must also bear in mind the impact this will have on the franchisees – and their staff – that make up their network. After all, a phrase uttered frequently by franchisors to prospects is “You’re in business for yourself but not by yourself.””

Making it clear franchisees are very much a priority for him, Richard Lowden, founder and CEO of car leasing franchise Green Motion International, says: “When building a franchise network, you have an ingrained responsibility and duty of care to your stakeholders. My priority remains building a network that will benefit both our customers and franchisees.”

Lowden concedes while it’s not his immediate plan to leave the Green Motion network, it’s a strategy on the radar of some franchisors. “The most important thing for anyone in this position is to create a succession plan that provides a strong platform for the next owner to spring from,” he says. But who would serve well as an heir to the franchise throne? High-performing franchisees, upper management and larger firms can always become potential candidates to take over.”

Looking at the car rental sector in particular, Lowden offered a prime example that he’s witnessed with Avis swallowing up franchises Budget and Payless. “When this happens, it’s vital the new franchisor makes the transition as seamless as possible for franchisees,” he says. This isn’t always the case though and, regrettably, some franchise takeovers can leave franchisees out in the cold. “In the more ruthless cases – such as Hertz’s acquisition of Dollar Thrifty – some franchisees simply didn’t have their agreements renewed,” Lowden alleges. “[While] that might have been good for the owner’s bottom line, it isn’t the way to grow a stable and prosperous brand.”

Not all franchisor departures will leave franchisees high and dry though – and they’d be wise not to if they wish to flourish, cautions Carl Reader, chairman of d&t, the business advisory firm. “Ultimately, the longevity of the franchise comes down to innovation of the original concept to ensure it stays relevant with changing markets and buyer mentality,” says Reader. “The biggest concerns of a new regime coming in or a buyout is always going to be that it breaks away too far from this concept and what franchisees are comfortable with.””

Any decisions made must ensure franchisees are kept in the loop or else their trust in the franchisor risks getting shattered. “If there isn’t transparency at any point, naturally franchisees will lean towards thinking the worst,” continues Reader, emphasising the power of communication. This is something that’s particularly true in a long-established franchise network or else there can be resentment brewing. “This is especially prevalent in a more mature network as the franchisees will invariably believe they know better than the new franchisor coming in, as they’re on the ground and work in the business,” he explains. He adds that open-mindedness is important for franchisees, however, as change is sometimes unavoidable.

A recent case of franchisor departure was demonstrated in February 2019 when kitchen makeover franchise Dream Doors joined multi-brand franchisor Neighborly. The acquisition saw Dream Doors founder Troy Tappenden exit his 20-year-old company as part of the takeover but existing managing director Philip Carr remained in his position. So it wasn’t all change for the network’s franchisees. “By joining the world’s largest franchisor of home services, Dream Doors will gain new vendor relationships, a powerful peer group of other Neighborly service brands and more,” said Carr at the time.”

Generally, things shouldn’t be too foreign for those in a network that’s undergoing a change of hands, according to Michael Hatchwell, partner at solicitor Child & Child, part of legal network Globalaw. “Frankly, if a successful franchisee’s operation is dependent upon the identity of the owner [or] the franchisor, there’s an inherent problem and risk in that set-up,” he says, noting the business should effectively be in the same place it was before the departure. According to Hatchwell, there should be no need for concern “if the franchisor is well-run and well-managed.””

To get everyone singing from the same hymn sheet won’t necessarily be straightforward but, at the same time, franchisees must fall into line whether they like it or not. “There’s unlikely to be any ‘approval’ right vested in any franchisee,” says Hatchwell. “The concept of franchisee approval is therefore not legally relevant to a change of ownership of the franchisor.””

While there’s nothing from a legal perspective that can be done, an awkward dynamic can be created between franchisor and franchisee. To prevent that, Reader advises: “In all these kinds of situations, it really is all about establishing and maintaining good, effective communication. For franchisors, I would recommend they actively engage with a franchise advisory council and really try to build good communication links with the network.”

Still, franchisees should dot their i’s and cross their t’s to ensure they know just exactly what they’re committing to and that it’s the franchise proposition rather than who’s running it that interests them. “If the owner of a franchisor is important to the success of a franchise, then careful thought should be given to what happens if that owner ceases, for whatever reason, to be involved,” says Hatchwell. “It would certainly be very sensible to consider not taking on a franchise from a franchisor where the owner was integral to the franchise’s success.”

Really, the bottom line is that a franchisor leaving to make way for a new owner can understandably be unnerving. But it’s important to also process the news with a rational mind.”Franchisees don’t necessarily need to be concerned [about a takeover],” reasons Reader. “Their view on it should be like how an employee might feel about a leadership change – after all, nobody buys a business to try and take it out of business.” Concluding with some additional positivity, he adds: “Provided the buyer has good intentions and the right level of funding to drive the business forward, it’s actually a really exciting time for franchisees.””

Zen Terrelonge
Zen Terrelonge