Franchise Audit

It is advisable to make an audit of a franchise when a company wants to acquire a franchise network. The purpose of the audit is to validate the financial, managerial and marketing networks. "A network is sound when 80% of franchisees pay their royalties", writes Olivier Gast.
by Olivier Gast

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It is advisable to audit franchise when a company wants to acquire a franchise network . The audit is to validate the financial value , marketing and managerial networks . " A network is within 80% when franchisees pay their royalties ," believes Olivier Gast .

How to prepare for the legal audit of your network by an investor ?

At an expert Franchise Manager in September 2006 . Distribution has become a capital-intensive industry .

The cost of commercial locations , rising rents , sophistication stores dearer costs of design and layout, increased upstream investment (logistics, information systems, marketing and brand their own products ), the adoption of development strategies signs outside their domestic market are all factors that increase the needs of distributors in equity.

The race for fame , which can only be acquired by a rapid geographical coverage of its market, requires heavy investment. Even the franchise can no longer be regarded as the mode of development of informed but impecunious genius. The franchise has become a strategic development choices which requires significant capital to structure and to support its network contract package, communication services, development and performance animation, direction sign.

Loans and conventional bank financing modes always allow the franchisor to support its needs in the most common operation. They do not however, and it is not also their function, to finance the transition from one stage of development to another, moving from a level of 50 to 100 outlets in two years, for example .

This explains the increasing calls franchisors to investment funds. The private equity sector experienced exceptional vitality in France . The capital market is " liquid on ." There are leverage effects never equaled , especially because of the low level of interest rates. Funds do not have difficulties to unbuckle their operations due to a relatively good liquidity of their assets : capital companies in which they invest to resell quickly and perfectly .

The funds from interested enough recently to distribution. This is a boon to be enjoyed . The area offers them for investment opportunities in mid-sized companies , less disputed that tickets for entry into the capital of large companies in other sectors . Above all, they understood the ease of generating shareholder value creation by duplication of the concept in new outlets. Moreover, the sector can generate in most cases significant cash flows facilitating acquisition debt repayments and finally it is simple to optimize the operation and finance development through the sale of real estate assets, often many and highly valued.

More recently still , they are interested in the franchise. Funds , some of which specialize in this type of organization of the distribution , found leverage effects specific to franchising: legal leverage , financial , marketing and human resources in particular . They were also able to appreciate the virtues of the free organization and business performance of duty that often exceed those integrated

There are therefore no longer hesitate. If you are under capitalized and your development ambitions are big, will fund a portion of your cake but should make it grow so that you will remain in the output of the largest that you could have funds have seul.Si you are tempted , be aware that after having identified the funds with which you want to enter into a discussion after their interest aroused by a first " teasing ", you will then need to submit a complete audit of your network. On this occasion , the entire contract package on your network will be reviewed : pre -contractual information and franchise particular document.

Before welcoming teams auditor of the fund, it is crucial to have prepared appropriately. It must be reviewed and updated these documents and more about your contractual risk areas that should be highlighted by the investor on which discussions should rise , impacting the conditions of the transaction. If you are a young franchisor , in view of the association with financial , integrate golds already this reflection to prepare for this possibility in the medium term .

Let's review the main critical points.

1 . Chance of nullity of contracts

This risk is associated in most cases with deficiencies of pre -contractual information or the non- delivery as provided by law document.

After validating the existence and delivery of this document at least 20 days before the signing of each contract, the investor examines the content . It validates compliance with all mandatory information . His attention is focused mainly on the achievement by the franchisor a proper study of the local market .

Most of the litigation the invalidity of franchise remains in effect focused on the absence or inadequacy of the study catchment area of the franchisee by the franchisor. It should not be too risky on this point.

Another sensitive issue is the communication of forecast financial statements .

If the franchisor , which did however not the obligation, would release the provisional accounts to the franchisee , the fund will pay attention to the conditions of preparation of these accounts and verify that the means employed by the franchisor for set were adequate and appropriate .

2 . Duration and conditions of renewal of contracts

Contract duration and maturity is examined first. Generally , the longer the contract , the longer the funds are assured of the sustainability of the network . Then, a network that most contracts expire before the end of the investment fund is worth less than a network with recent contracts and a wide variety of maturities.

The conditions for renewal of the contract are also scrutinized : the renewal is it operated by tacit agreement ? Are there any plans on the contrary there is no right of renewal and the parties shall meet to consider the possibility and terms of a new contract ?

No system is actually preferred . It is essential however that the investor can enjoy franchisee satisfaction related to their profitability and proper functioning of the network, which will always be the determining factor in the renewal of the contract and therefore the sustainability of the network animation.

3 Review of the quality of the franchise . AnimationLe training and training content as animation will be discussed.

Inadequate training can in fact ensure proper integration of the franchisee remains too alien to the values ??of the network and not sufficiently mastered the know-how to reproduce and ensure the success of the operation .

An animation that would be almost non-existent or insufficient in relation to the size of the network and / or its characteristics and those of the market may contribute to deteriorate the relationship between franchisor and franchisee view to generate litigation and dissent .

More , in addition to the review of contracts , funds send their teams to the field to validate the quality of the implementation of training and entertainment .

4. Network Control

All clauses that allow the control of the network are then apprehended :

- clauses to validate the application of the concept (monitoring and assessment visits visits ) ;
- terms of monitoring the situation of the franchisee ( clauses organizing reporting, exclusive collaboration clauses of a personal basis ) ;
- clauses to ensure the involvement and loyalty of the franchisee (control of the operating company , obligation of personal investment in the operation of the franchise , for example) ;
- control clauses commercial locations ( pacts preferences, rights of pre-emption , not competition);
- exit clauses of contract (express resolutive clauses , descent teaching and other duties related to the termination , non-competition , no personal basis reciprocal preventing the franchisor to sell its network without the approval of the franchise ) .

In general , funds like the franchisor exercises tight control over its franchisee : their conception of the franchise rather than a vertical relationship . In this regard, it is also common that they appreciate the networks with a fairly high level of diversity, such as those using mounting the lease management backed by a franchise agreement : These networks have a high heritage value.

Review of pending litigation 5.

If disputes between franchisor and franchisee (s) are being instance , funds require their list , the amounts of adverse claims and examine the most significant litigation to assess the existing risks themselves . Of course, games are be provisioned if they had not already been by the franchisor.

Finally, to conclude , the funds develop real expertise of the franchise.

They shall check that the franchisor control "knowledge franchise ." It must be a good franchisor quality of DIP and contract control functions development and animation, network control. When these ingredients are combined , negotiation is in the best light. Hence the need to prepare well in advance!
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