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
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
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,
whether landlord consent to the conversion of the stores will
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
ensure that the agreement provides an express right for the
franchisor to a competitive (or complementary) franchise
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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