What is Franchise Acquisition?

Franchise acquisition is a common type of transaction in the franchising world. It involves a company purchasing an existing franchise or franchise system. This article will explain franchise acquisition, the advantages and disadvantages of buying existing franchise businesses, and necessary legal considerations for those interested in purchasing an existing franchise system.

Franchise Acquisition Explained

Franchise acquisition refers to a company acquiring the rights to a franchise or an existing franchise system. Upon purchase, the previous franchisor transfers ownership to the acquiring company. For example, an ongoing significant franchise acquisition concerns the KFC brand. There are over 1000 KFC restaurants in the UK. The global franchisor Yum! Brands is currently in the process of acquiring EG Group’s 218 KFC franchise units. 

Acquisition can be a complex process that requires careful planning and execution to preserve the franchise’s value and ensure business continuity across the system. 

The reasons behind franchise acquisitions vary. A company might buy another’s franchises to expand operations and diversify their portfolios. Alternatively, franchisors may offer to sell their franchises due to financial difficulty.

Advantages of Franchise Acquisition 

1. Brand Recognition 

With franchise acquisition comes an established brand. It will have a reputation and an existing customer base. Loyal customers are invaluable and can ease the transition process for the acquiring company. 

2. Tried and Tested Systems 

All franchise networks vary in their age and value. For example, a new franchise system will be less settled than an older, more extensive network. The new franchise system will have a proven business model but is less time-tested than an established network. 

Franchises available for acquisition will already have proven business models, track records, and personnel. Additionally, an established network will have existing supplier relationships, a marketing history, and credibility with lenders. 

3. Investment 

The acquiring company may not need to invest significantly in aspects typically associated with establishing new franchise networks, such as:

• initial training programmes; and 
• new location set-up. 

However, investment in franchisee support can be pivotal in supporting the transition process when ownership transfers from the previous franchisor to the acquiring company. 

Disadvantages of Franchise Acquisition

1. Transition Challenges 

While franchise acquisition can offer several potential benefits, it also has some possible drawbacks. One of these drawbacks involves difficulties that can arise during the transition process. Integrating a new franchise system into an existing business can be complex. It can cause disruptions in operations and management. This may lead to resistance from franchisees who have become accustomed to the previous franchisor’s system. 

Franchisees may have different corporate cultures, values, and operating styles. Their resistance can stem from concerns over change.

2. Brand Identity 

If the acquiring company does not carefully handle the transition, the change in ownership can impact the franchised brand’s perception among its customers. 

3. Finances 

Acquiring a franchise system can come with significant financial commitments. This is particularly true if the previous franchisor sold the franchises because of financial difficulties. The financial obligations of an acquisition go beyond the purchase price. They can also include integration costs like updating systems and marketing strategies, as well as addressing any existing problems within the acquired company.

Legal Considerations for Franchise Acquisition

1. Due Diligence 

The fundamental commercial principle ‘buyer beware’ applies to the franchise acquisition process. This phrase means the responsibility is on the acquiring company to be cautious and aware of potential risks during the purchase process. The purchaser must assess the quality and value of the franchise system. 

The purchaser needs to take a proactive approach to understand what they are buying. Due diligence may involve carefully reviewing the following:

• financial records;
• legal agreements;
• franchisee contracts; and 
• other relevant documents. 

It also includes seeking advice from experienced professionals such as accountants, lawyers and business advisors. 

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2. The Existing Franchise Agreements 

Franchise agreements are fundamental to any franchise. The acquiring company must understand the terms of these agreements. They need to thoroughly understand both their rights as franchisors’ and their franchisees’ rights and obligations. 

Depending on the terms of the franchise agreements, the acquisition may require approval from existing franchisees within the system. These franchisees may need to consent to the transfer of ownership. Therefore, the acquiring company may need to assure them of continued support.

3. Intellectual Property 

Franchise acquisition often involves the transfer of trademarks, such as brand names and logos. To maintain the brand’s integrity, the acquiring company must ensure proper documentation and adherence to relevant legal processes when obtaining such assets. 

As acquisition can be complicated, it is advisable to seek legal advice to ensure a legally sound transaction. 

Key Takeaways 

Franchise acquisition offers a fast track to growth with established brands, proven models, and existing operations. While it reduces investments in training and setup, integration challenges and potential franchisee resistance can arise. Acquisitions can be expensive, particularly with struggling franchises, with costs beyond the purchase price, including integration and network issues. To navigate these complexities, conducting thorough due diligence, consulting a legal professional, and having a clear understanding of franchisee agreements and intellectual property rights are crucial for a successful acquisition.

If you require legal advice concerning franchise acquisition, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.