Feedback Form
Home Features Mastermind Forums About Advertise Blog Network Contact Be An Author

The Hidden Costs Of Acquiring Another Franchise System

The Hidden Costs Of Acquiring Another Franchise System

Generally speaking, when a franchisor makes the decision to acquire another franchise system, it is looking for a similar system in the hope that some economies of scale can be realized. The franchisor may also be acquiring some unexpected legal headaches that should be fully flushed out prior to completing the acquisition.

The franchisor may want to add or subtract certain items from the acquired franchisor’s (“Newco’s”) system to either allow for additional distribution of the franchisor’s product or to make the systems more similar. Otherwise, the acquiring franchisor may have plans to convert Newco’s system to the franchisor’s system.

As the acquiring franchisor conducts due diligence on Newco, it should review Newco’s existing franchise agreements to determine whether or not language is included that allows the franchisor to add to, subtract from, or alter the existing system at its discretion. The franchisor should also plot the locations of Newco’s franchisees on a map to determine whether any of them are within the trading area of the franchisor’s franchisees.

Although the franchise agreement may allow for an altering of the product mix with Newco’s franchisees, the acquiring franchisor must take in into account its duty of fair dealing in exercising any discretionary powers under the franchise agreements, a duty that is codified in Ontario and Alberta under franchise legislation in the two provinces. If, for example, the franchisor decided to require Newco’s franchisees to stop selling a product that competes with the franchisor’s system and there is no independent reason for doing so other than the elimination of the competitive product for the benefit of the franchisor’s franchisees, the franchisor may be seen to be not acting in good faith. In Gateway Realty Ltd. v Arton Holdings Ltd. and LeHave Developments Ltd, a Nova Scotia court has held that bad faith is:

when one party, without reasonable justification, acts in relation to the contracts in a manner where the results would be to substantially nullify the bargained objective or benefit contracted for by the other, or to cause significant harm to the other, contrary to the original purpose and expectations of the parties.

In the above scenario, there may also be competition law issues if the result of a product removal is to unduly lessen competition.

If the product being replaced was unique to Newco’s franchise system and the removal of the product, would “substantially nullify the bargained objective” of the franchise agreement, then the franchisor should proceed with caution. The practical consequences of introducing new products or re-branding locations is that it may cost the franchisor a significant amount of money to coerce franchisees into making the required changes if the changes would result in a franchise fundamentally different than what the franchisee had originally bargained for.

The franchisor may decide that it will stop promoting the growth of one system over the other. In the Ontario case of Shelanu Inc. v. Print Three Franchising Corp. the court held that there was nothing in the franchise agreements which required the franchisor to maintain a certain level of franchisees. That being said, if the franchisor stops promoting the Newco brand, it may be open to liability for misrepresentations made in marketing materials or other representations made to franchisees with respect to building a certain number of new stores to help support marketing and brand name awareness.

If the franchisor’s goal is a complete re-branding of Newco’s system, the franchisor should have, in advance of the acquisition, mapped out areas of potential conflict that would result in franchisees of both systems competing too closely or encroaching on one another. The leading Canadian case on encroachment is a 1995 Quebec case, Provigo Distribution Inc. c. Supermarche A.R.G. Inc. In that case, the Court found Provigo, the franchisor, to be acting in bad faith towards its grocery store franchisees when expanding its corporately owned discount grocery stores. The Court stated that, although it was commercially reasonable for a franchisor to undertake changes to develop its system in tandem with contemporary market realities, it had to do so in ways that would not injure or destroy the franchise relationship.

If the franchisor intends to operate two competing systems, then again the issue of encroachment must be reviewed. In the Shelanu Inc. case discussed above, the franchisor opened a smaller, but nearly identical franchise system targeted at a slightly different group than the original franchise system. The Court found that the establishment of a direct competitor was fundamentally at odds with the obligation to deal in good faith and that, without the agreement of the franchisees of the original system, the franchisor could not properly and fairly institute the new concept. The law may not view the purchase of an existing system, where competition pre-existed, in the same light as creating a new one, as in the Shelanu case, but decisions made after the common ownership will be scrutinized by franchisees much more closely as franchisees of both systems will not want the other to receive any unfair advantage.

Although there can be no certainty as to the outcome of negotiations with franchisees of the acquired system, the acquiring franchisor is best advised to make itself fully aware of the potential hidden costs of the acquisition and budgeting an appropriate amount to cover such costs prior to completing the purchase.





The Hidden Costs Of Acquiring Another Franchise System - To learn more about this author, visit Peter Macrae Dillon's Website.

Like this article? Share it with your friends

Article Feedback
 Article Feedback No article feedback found.
  Leave Your Feedback
article feedback

Article Feedback
John Power
John Power, founder of Biltmore Franchise Consulting, has extensive experience developing and marketing franchises and business opportunities. He has been in and around franchising for over twenty years. From 1980 through 1990 he conceptualized, organized, and developed the American Video Association. He grew AVA to 2,000 national members, before selling the company it 1990. It was later merged into another home video marketing company. From 2000 to 2005 he worked as a contract marketing and human resources consultant to several local and national companies. In 2005 Mr. Power began working as a franchise development consultant on a full-time basis. Since that time he has helped more than three dozen companies initiate and develop their franchising program. He notes that there are many companies interested in developing a franchise program, and who need his specialized assistance. Mr. Power is a “hands-on” franchise consultant. He said, “I am the ‘nuts and bolts’ person who tends to the details for my clients.” Mr. Power holds a B.S. degree with a major in Marketing. See: www.biltmorefranchise.com You may contact Mr. Power at: jpower@biltmorefranchise.co - Visit John Power's Website

Anne Barr
Anne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website

John Brennan
John Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website

Jay Kubassek
(Jay's Full Bio: EvanCarmichael.com/jaykubassek)  In five years, Canadian-born entrepreneur Jay Kubassek went from selling mufflers at a Midas franchise to revolutionizing Internet marketing with the 2004 launch of CarbonCopyPRO, a online marketing education company, now worth over $20 million with customers in over 160 countries.

 

As an independent film producer, his upstart film fund Aliquot Films is currently producing a films with Spike Lee and Abel Fererra (starring Ethan Hawke and Dennis Hopper.)

 

Jay's entrepreneurial spirit is irrepressible. He’s the owner of five companies, a professional speaker and trainer, international real estate developer/investor, extreme sport enthusiast and emerging philanthropist. 

 

Jay resides in NYC with his wife Jamie, son Milo and dog Cooper.  Visit Jay's official website: www.JayKubassek.com - Visit Jay Kubassek's Website


To learn more about the Evan Elite Author Program please contact us.

About The Author


Peter Macrae Dillon
(Visit Peter's Website) Peter Macrae Dillon is one of North America’s leading and most-respected franchise attorneys. He is licensed to practice law in Ontario and New York. He specializes in advising start-up franchisors in the conversion and early stages of franchising. His group represents mature Canadian and American franchise systems operating in Canada, the United States, and internationally. Email Peter at peter.dillon@siskinds.com or visit his website at: www.franchiselaw.ca peter macrae dillon franchise franchisor lawyer attorney Toronto Ontario Canada www.franchiselaw.ca

Peter Macrae Dillon is a Platinum author on EvanCarmichael.com
About The Author

View Author Blog
View Author Blog

View Author Video
View Author Video

Free Downloads


Peter Macrae Dillon's

Complete
List Of
Franchises
Articles

Name
Email
If you enjoyed this article, get Peter Macrae Dillon's Complete List of Franchises Articles For FREE!

More Peter Macrae Dillon
How to Franchise Your Business
Recent Issues of Importance in Franchising Franchise Lawyer Canada
The Hidden Costs Of Acquiring Another Franchise System
Franchise Branding
FRANCHISE EARNINGS CLAIMS AN INTRODUCTION PART I
Passing Off and the Protection of Trade Dress in Franchising
16 Things You Should Know about Ontarios Franchise Legislation
Can American Franchisors Use Wrap Around Disclosure Documents in Canada
Ending the Franchise Relationship
FRANCHISE EARNINGS CLAIMS PART II
Free Downloads


 
 
 


Evan Elite Authors
Joe Dager  
Dianne Crampton  
Jay Kubassek  
Evan Elite Authors

Become An Author
Have you written articles that would be of value to entrepreneurs? Become an expert on our site by publishing them! Expose yourself to a wide audience, drive more traffic to your website and get more sales! Click Here for details.
Become An Author

Evan's Latest Video
Modeling the Masters: Learn the true secrets behind Walt Disney's business success factors & grow your company! Video produced by Phanta Media
Evan's Latest Video

Business Opportunities
"Learn straight from Evan how you can Make a Full Time Income (And More) from a Website"

How to Start An Online Business

Click Here To Learn More
Business Opportunities



Evan's Newsletter
Get advice & tips from famous business owners, new articles by entrepreneur experts, my latest website updates, & special sneak peaks at what's to come!
Name:
Email:
Evan`s Newsletter

Free Downloads
Increase Sales Icon Increase Sales
Red Realestate CSS Template Icon Red Realestate CSS Template
Ideal Website Template Icon Ideal Website Template
Acronym Soup Icon Acronym Soup
Reference Check Form Icon Reference Check Form
Free Downloads - Complete List

Entrepreneur Tools and Guides
Choose A PR Topic
Choose A PR Topic
Press Release Builder
 
Top 50 Social Media Blogs
Top 50 Social Media Blogs
Top 50 Social Media Blogs
 
Entrepreneur Tools and Guides

SEO For Africa
SEO For Africa
Epi Amouzou Avetonou, Togo,
Epi Amouzou
Avetonou, Togo
SEO For Africa

If I Were A Startup...
Geoff Whitlock, $53k to $507k in 3 years
Geoff Whitlock
$53k to $507k in 3 years
Lisa Shepherd, $335k to $1.1 Mil in 2 years
Lisa Shepherd
$335k to $1.1 Mil in 2 years
If I Were A Startup... - Complete List

Famous Entrepreneurs
Ron Joyce, Tim Hortons
Ron Joyce
Tim Hortons
Tom Monaghan, Domino's Pizza
Tom Monaghan
Domino's Pizza
Famous Entrepreneurs - Complete List

Entrepreneur Advice
David Allen, Getting Things Done
David Allen
Getting Things Done
Ask Michael Gerber, Reader Questions
Ask Michael Gerber
Reader Questions
Entrepreneur Advice - Complete List

Popular Articles
(Premium Authors)

     Where's The Money?
By Connie Sparks
     What is Social Responsibility and How It Can Work For You
By Connie Sparks
     Why Small Businesses Don't Survive
By Connie Sparks

Have A Suggestion?
Toronto Salsa Classes / Toronto Salsa Lessons Email us your ideas on how to make our website more valuable! Thank you Sharon from Toronto Salsa Lessons / Classes for your suggestions to make the newsletter look like the website and profile younger entrepreneurs like Jennifer Lopez and Sean Combs!
Have A Suggestion?

More Evan Carmichael
More Information