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Bulletin | Covid-19

Beyond COVID-19: Is it Now an Appropriate Time to Look for New Franchisees?

Fasken
Reading Time 6 minute read
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Franchising Bulletin

Now that the reopening phase is well underway, many franchisors are questioning the advisability of resuming (or, for some, continuing since they have never suspended it) their search for new franchisees.

As mentioned in previous Franchise Bulletins, the business and commercial world will not be the same as it was before.

Among many others, we are now experiencing, and will continue to experience, for at least several months, the following changes:

  • Continued high standards of sanitation and physical distance, which require most businesses to review their procedures for hygiene, sanitation and protection of the health of their employees and customers and, for many, the physical layout of their franchise locations (with, in many cases, a decrease in their capacity to receive customers);
  • Acceleration of online and distance commerce as new consumer habits have been adopted during the period of containment;
  • A marked increase in telework which entails a decrease in the number of people in and around office buildings;
  • Significant job losses in several sectors of activity at all levels;
  • Uncertainty about the speed and extent of the recovery in consumer spending, which may differ from one industry to another and will also depend largely on consumer discretionary income (which may have declined during the crisis) and changes in consumption and travel patterns.

In this regard, some industries (including home improvement centres, garden centres, pool shops, landscaping and gardening businesses) are already reporting a marked increase in sales, while others (including dining rooms, clothing stores and large shopping centres) appear to be having more difficulty restoring their previous sales levels.

In such an environment, which is still characterized primarily by uncertainty (including the risk of a possible new wave of the pandemic), would a franchisor be better advised to suspend its search for new franchisees or, conversely, to resume or continue its search for new franchisees?

On the one hand, it is quite likely that the pool of potential new franchisees has grown in recent months, both because of job losses and the desire of many people to take advantage of this crisis to make changes in their working lives.

Also, in many places, it is likely that the availability of commercial locations will increase over the next year.

In some networks, some franchisees may want to sell their franchised businesses as much for financial reasons as to take a well-deserved retirement.

There is therefore an opportunity for a franchisor to find interesting new franchisees to open new locations as well as to ensure a succession within its existing network.

For franchisors who decide to resume their search for new franchisees, new tools are now available to them, including virtual franchise shows, webinars and videoconferences. Certain recognized tools (including the FlagFranchise platform) also remain highly relevant.

However, some important precautions must be taken.

First, a franchisor must ensure that its business model can still be profitable for a franchisee in the new post-COVID-19 environment.

If this is not the case, a prudent franchisor will make the necessary changes to ensure that its business model can be profitable again, and will test and experiment with these changes before proposing them to new franchisees.

For example, some franchisors will want to add certain activities (such as delivery) to their franchised businesses, others will want to review certain processes (such as distance selling or communications with customers in the network), others will want to increase their online sales (which may require new arrangements with their franchisees) and others will want to change the number and size of their franchised businesses (fewer and larger locations each or, conversely, more smaller locations).

Whatever changes the franchisor makes to its business model should, in all cases, be proven (both operationally and in terms of profitability for a franchisee) before granting new franchises under that modified model.

It would also be relevant to review the provisions of the franchise agreement dealing with changes to the franchise concept and business model to ensure that they provide the necessary latitude to make, when the situation requires it, the changes necessary to maintain the continuity and profitability of the network and its franchised businesses, since it is plausible that other adjustments will prove necessary for several networks over the next few months.

Secondly, it will be necessary to review the financial forecasts provided to any candidate for a franchise.

Many pre-COVID-19 data may no longer be appropriate and should be reviewed in light of what happened during the acute phase of the crisis and, even more so, since the business has reopened.

The post-reopening data are themselves also questionable, as it is still too early to know whether current sales are temporary (as consumers catch up on purchases they were unable to make during the crisis) or permanent. Also, the true medium- and long-term economic impact of the crisis (particularly in terms of jobs and the financial health of consumers) and the risk of a second wave of the pandemic are still unknown.

It is also too early to measure the impact of temporary government assistance to individuals (and the impact of the end of this assistance) on the consumers' available budget.

Therefore, great care must be taken in the preparation of any financial forecast for a franchise candidate and the important imponderables that still exist must be taken into account. The franchisor could also add a cautionary notice to the effect that, if this is the case, the financial forecasts are based on data prior to the COVID-19 pandemic and that any new franchisee should take this into account in its due diligence process.

Thirdly, the franchisor will have to be transparent, in particular as to the impact (past, present and foreseeable) of the crisis on its franchise network.

Let us not forget that, from a legal point of view, a franchisor has the obligation to inform any future franchisee, before signing a franchise agreement, of any material information known to the franchisor. For the purposes of this obligation, material information can be defined as any information that could reasonably be expected to have an impact on the franchisee's decision to sign the franchise agreement on the terms proposed by the franchisor.

In provinces with franchise legislation, the franchisor's disclosure document will therefore also have to be carefully reviewed to provide complete and up-to-date information to prospective franchisees to whom such a document must be provided.

In this regard, the clauses of the franchise agreement dealing with the risks related to the franchised business and their acceptance by the franchisee should be reviewed to ensure that they are complete and adapted to the current context. In several cases, it may be appropriate to add one or more sentences dealing, in general terms, with the impact of the COVID-19 crisis on the franchise network.

Fourth, the choice of a new franchisee will be even more crucial than before.

Among other things, the new franchisee should have a greater ability to accept change and to live with a slightly higher level of risk than before (which may also offer interesting opportunities).

It is also possible that financial institutions may be more demanding in terms of the financial resources required to provide loans to new franchisees.

Fifth, many franchisors are already adjusting their schedules for the opening of new franchises, particularly to provide for the possible postponement of opening dates in the event of a second wave of the pandemic.

Fasken has all the expertise and resources necessary to help you better develop and manage your franchise network and achieve your objectives, as well as to draft complete, adequate and, even better, well-adapted agreements that meet your objectives, needs and resources, in order to protect your rights while avoiding potential pitfalls.

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