Many years ago, I met a fellow franchisor, he had built a good company with 250 franchisees who operated mall kiosks, you know, those carts in malls that sell various products. What he did was to make each Kiosk his own business, first as “independent contractors” but later as Franchisees due to the rules of the Franchise Law. Each franchisee had to sign a two-year, non-automatic renewal franchise agreement, in which the franchisor could simply take over the business and location, since it already had the space lease agreement with the malls, including corporations. owners of many shopping centers around. the country.
After two years, he stopped renewing franchise agreements, took control of all those little businesses, and then sold everything and retired a very rich man. Unfortunately, many of the independent contractors, turned franchisees, were forced to retire after building their businesses and providing a substantial amount of goodwill. The franchisor concept was built with the blood, sweat, and tears of all those people who, in the meantime, made decent money, but basically ended when the franchise agreement term ran out.
Recently, there is an interesting company in the “Handy Man” sector that has a franchise agreement that states that it can unilaterally buy back the franchisee’s business at any time after 2 years of operation. In the Franchisor’s purchase option there is a mathematical formula for the valuation of the Franchisee’s business that negates the value of any “goodwill” and allows the Franchisee to choose whether to see the “Fair Market Value” of the assets (used equipment, office furniture) or twice the earnings before interest, taxes and amortization (EBITA).
Why would a franchise buyer buy a franchise like that? I suppose there may be some situations where it makes sense, for example the franchisee just needs a couple of years of income and thinks he can build a good business “book” and if it starts to go bad the franchisor can buy it and can go ahead, less risk? But what if the franchisor decides not to buy and the business fails? What if the business is wildly successful and the franchisee is forced to sell a thriving and growing business?
If you think about it, it’s a brilliant strategy for a franchisor, have others build your business, take all the risks, and if they’re successful, terminate your franchise agreement instead of renewing it, and if they fail, just let them fail. , then sell that territory to a new franchise, until one is successful and then keep winning and building on the backs of the others. As a franchise buyer, it may be wise to recognize such strategies and tire of them, unless it serves your temporary purpose of a short-term business and solid temporary cash flow based on your skills and the franchisor’s model. Think about this.