Valuing Your System: The Devil Is in the Details
This article was featured in the October issue of Franchise Dictionary Magazine.
Every month I sit down to write a column about the things that are important and impactful to a franchisor from my perspective as a franchise attorney. This month, I decided that nothing says it better than one of my favorite phrases; the devil is in the details. And the details that trip up many franchisors are the state of their franchise agreements. How well they are organized, how correctly they are signed, and can you really trace compliance from signed FDD receipts to a 360˚ view of your current and historical state registrations.
I often hear people stress the fact that if you ever get sued, you really need to be sure you have the files buttoned up. Even if only 2% of your agreements ever get challenged, you don’t know at the outset which 2% it will be. That is true, but only a very small part of the picture. What you really should be thinking about is your final exit strategy when 100% of your franchise agreements will be picked apart by a very detailed due diligence team compensated for finding mistakes, errors, omissions, and inconsistencies.
We expect entrepreneurs to ignore the 2% case; after all, if they weren’t comfortable with risk, they wouldn’t be entrepreneurs. But franchisors shouldn’t have clean files just to protect them from the minority of deals that go bad; they should have clean files to maximize their value in the long run. A franchise system’s value lies in its future royalty stream’s predictability and stability, which is documented and secured by every franchise agreement. Each franchise agreement’s integrity is based on its enforceability, which is directly correlated to how well franchise rules and regulations were adhered to and followed over the years.
The devil is in the details.
It will either work for you or against you when it comes time to harvest the years of hard work that it takes to build a successful system. If your system is lacking, now is the time to address it with your professional team.
Better to have your franchise lawyer find mistakes now than a potential buyer find mistakes when you are close to the deal of a lifetime.
To see all of Tom’s featured articles on The Franchise Dictionary Magazine, visit this page.