Recent articles have indicated that there is going to be surge in franchise sales in the next two to three years as we are on our way to coming out of the pandemic. Of course, the pandemic has impacted some franchise systems more than others based on the nature of the franchise business and the services and/or products offered, and some will be slower to bounce back. However, what we have seen in our own practice this past year is that franchisors are still selling franchises and franchisees are still purchasing franchises.
We have written blogs in the past about the due diligence prospective franchisees should conduct before making the decision to purchase a franchise (see Looking to Buy a Franchise? Your Due Diligence in Conjunction with Our Legal Review from July 2018). In this new environment we live in, new areas need to be investigated during the prospective franchisee’s due diligence.
– How was the franchised business impacted by the pandemic? Is it the type of business that can survive another pandemic or recession in the future?
– How was the franchisor impacted financially by the pandemic? Is the franchisor’s financial condition now improving?
– Were measures taken to minimize the financial hit by reducing expenses while revenue was down? Did the franchisor temporarily or permanently reduce its staff, and if so, did that reduction impact the level of support the franchisor provides to its franchisees?
– Did the franchisor provide immediate support for the franchisees when the pandemic hit and ongoing support throughout the last year, including providing new written policies and procedures and related training?
– Did the franchisor keep open the lines of communication to hear about how the franchisees were being impacted and to provide input and guidance?
– If there was a significant impact on the revenue of the franchised businesses resulting from the pandemic, did the franchisor offer any financial concessions or payment deferrals?
– Did the franchisor work to make temporary modifications to the franchise model to respond to the impact of the pandemic on the franchised businesses? Was this done with input from the franchisees?
– Is this franchisor taking this time as an opportunity to re-evaluate the franchise model and to address any changes that might be a benefit to the franchised business based on changes in consumer demands and preferences, and new ways that customers are purchasing products and services?
– Is the franchisor embracing technology to improve customer access to the products and services offered by the franchised businesses and to improve ways to reach customers, especially where customers have changed how they want to purchase the products or services sold by the franchised business?
– What financial data is the franchisor showing in Item 19 of its 2021 Franchise Disclosure Document? Is comparison data being provided for pre-pandemic financial performance in 2019 and data during the pandemic in 2020? Or has the franchisor deleted all Item 19 financial performance representations in the 2021 FDD? If so, be sure to discuss with existing franchisees their financial results pre-pandemic, during the pandemic and now that businesses are opening up again.
These are questions that should be asked of the franchisor and its management as well as franchisees who have weathered the storm of the pandemic since March 2020. Your franchise attorney can help you assess the information that you are able to collect on pandemic related issues along with the review of the Franchise Agreement and information in the Franchise Disclosure Document.