8 Tips to Consummate the Value of Goodwill
The franchise relationship is a marriage of convenience that in order to succeed needs close collaboration between franchisees, franchisors and suppliers. The survival of this co-dependent partnership requires the valuation of goodwill, which both partners need to agree on, otherwise the marriage may end up âon the rocksâ. This includes a healthy understanding of the valuation triggers to calculate goodwill in at various stages of the relationship.
We explore 8 valuation triggers which may be considered at various stages of the Franchisor and Franchisee relationships to recognize the âgoodwillâ in the marriage and ensure a profitable partnership together.
1. Acquisition
Acquisition is the initial franchise grant which generally occurs when a new franchisee begins a contractual relationship with the Franchisor. Typically, goodwill valuation events may occur during the first term of the franchise grant and upon renewal options. Other valuation event may occur on exit events either implied, or expressed.
Tip: Ensure that goodwill is expressly accounted for at the changing of any partnership.
2. Assignment
Assignments occur when a franchisee assigns the franchise rights from an unexpired license term to a prospective franchisee. Generally, for this event business goodwill is subject to the unexpired portion of the current term and the rights to any renewal options.
Tip: Review the franchise agreement carefully as the assignee may be restricted to the rights attached in an unexpired license term.
3. Transfer
A simple transfer occurs when a franchisee transfers the rights to the unexpired license term to a new Franchise owner. A conditional transfer occurs when a franchisee transfers the rights to the unexpired licensed term to a purchaser, subject to the granting by the franchisor of a fresh full term license to the purchaser.
Tip: A franchisee should favour a conditional term over a transfer of a full license term because of the increased market value of a full term license grant.
4. Surrender
A surrender and resale contemplates a franchisee voluntarily surrendering its rights to the franchisor on the condition that, the franchisor grants a full term license to a pre-approved purchaser.
Tip: This is the cleanest, simplest and least costly of the options available to a franchisee who wishes to sell out of a partnership. Goodwill should be considered upon exit.
5. Buy-back
A buy-back occurs when a franchisee voluntarily surrenders to the franchisor in the absence of a ready and willing purchaser. It is only something the franchisor may do as part of the commercial compromises to protect the brand.
Tip: This situation occurs where the franchisee wishes to exit the franchise before an approved purchaser is found, goodwill should be part of the discussion in buy back arrangements.
6. Expiry
In an expiry event there is no unexpired license term component or renewal option, therefore no consideration is due by the franchisor to the franchisee. This approach is commonly called upon to manage instances when there is an expiry without exercise of option for extended terms, or an expiry of extended franchise term.
Tip: Performance rewards may exist or an exit payment tied to a restrictive covenant to the outgoing franchise principal.
7. Closure
A closure occurs when a bilateral agreement is reached between franchisor and franchisee to cease operations, close the franchisee-operated business, and in most cases, vacate the premises.
Tip: Generally, franchisee-operated business goodwill is subject to the unexpired portion of the current term, and the rights to any renewal options. Any compensation fee is entirely at the franchisorâs discretion including accounting for goodwill
8. Termination
In most franchise agreements, the franchisee accepts that proper and lawful termination does not confer on the franchisee any right to payment of compensation. Generally, there are two types of termination, without cause and with cause, the latter occurring with relatively less frequency.
Tip: Many franchisors generate an internal policy document that outlines special circumstances, including compassionate grounds, under which a franchisee may receive limited compensation, notwithstanding a termination with cause accounting for goodwill.
Accounting for goodwill is a critical component of valuing the important intellectual property in the agency relationship between Franchisor and Franchisee.
Not all franchising partnerships are destined survive. Pastacup, 7 Eleven and Evolve Salons and Eagle Boys Pizza are examples of franchises that have experience difficulties in recent times.
While the reasons for divorce may be varied, invariably both franchisor and franchisee can account for goodwill at the appropriate times to ensure a productive and ultimately profitable partnership.
Dr Maurice Roussety is a Consulting Strategist for DST Advisory and Lecturer in Small Business, Franchising and Entrepreneurship at Griffith University in Queensland, Australia. He has worked with leading organisations such as Queensland Transport, IAG, Westpac, Australia Post, Coles Myer, Red Rooster, Commonwealth Bank, ACCC, and Optus. Maurice holds a PhD in Intellectual Property and Franchise Goodwill Valuation. He also holds a Masterâs degree in Leadership and in Business Administration. He is available for consulting and public speaking engagements and can be contacted further at maurice@dstadvisory.com or you can visit him at www.mauriceroussety.com.au
