Acquiring competitive franchise networks

The difficult economic conditions and the high numbers of franchise systems in Australia are likely to result in significant opportunities for franchise networks that are performing strongly to acquire a competitive network that is underperforming.

In addition to the considerations that are applicable to all transactions in the franchise industry (for example, financing, structuring, due diligence and implementation), if the acquisition is of a competitive network then a number of additional factors needs to be considered.

The first and most important issue is the potential impact on competition in the relevant market and whether the ACCC is likely to object to the acquisition. The acquisition of the Australian operations of the Blockbuster network by Video Ezy in late 2007 is an example of the role that the ACCC can play where one competitor is buying another. While the ACCC eventually decided not to object to the proposed acquisition on the basis of court enforceable undertakings provided by Video Ezy, the process significantly increased the time and expense involved in completing the transaction for both parties. If competition issues are likely to be a concern then they need to be considered at a very early stage to ensure that time and money is not wasted on a transaction that is unlikely to ever proceed.

If a purchaser intends to acquire a competitive franchise network and convert the franchised stores to operate under the purchaser's brand then this will give rise to further issues. Consideration will need to be given to the conversion process, for instance:

• whether the consent of the vendor's franchisees to the sale will be required
• whether the vendor's franchisees can be required to convert to the purchaser's brand under the current franchise agreements
• how the conversion process will be handled and who will assume the conversion costs associated with the change
• how to deal with "clash sites" (i.e. where a franchisee of the vendor is located within close proximity to a purchaser's franchisee) and the impact on any exclusive territories provided to existing franchisees of either network, and
• whether landlord consent to the conversion of the stores will be required.

To ensure that a franchisor is well placed to take advantage of any opportunity to acquire another franchise network we recommend that when considering the terms of a proposed or new franchise agreement a franchisor should:

• avoid granting exclusive territories where possible (or at least include express carve-outs to preserve any future strategic decision)
• ensure that the agreement provides an express right for the franchisor to a competitive (or complementary) franchise network
• require franchisees to consent in advance to the assignment or novation of their franchise agreements by the franchisor, and
• reserve the right of the franchisor to require remodelling of the business premises, changes in equipment and changes in trade marks and corporate image at the franchisee's expense.

By Marshall Bromwich - Deacons Lawyers

Deacons Lawyers provide franchisees and franchisors with franchise legal advice