Earlier this year, Ken LeBlanc was feeling pretty good about his company's growth. As the CEO and president of Propertyguys.com, he'd seen the Moncton business go from a single shop to 94 franchises across Canada in under 10 years.
On a roll, he and his team of six weren't ready to stop. Like many Canadian companies looking to expand, they set their sights south of the border. Propertyguys.com facilitates for-sale-by-owner transactions through its national website, in a similar manner to mls.ca but with franchisees trained as "private sale professionals" in lieu of licensed real estate agents. "We realized that there was a saturation point in Canada and wanted to keep growing," Mr. LeBlanc says.
Before long, Mr. LeBlanc found himself neck-deep in serious negotiations with a handful of territory developers (buyers who take on an entire region and then sell individual franchises, which report back to Propertyguys.com). Things were progressing on schedule, with Propertyguys.com entering into verbal agreements, including sales amounts in U.S. dollars, with three potential buyers. And then the Canadian dollar hit parity with the greenback.
"All of a sudden we find that we're losing 16 per cent of our bottom line just because of the exchange rate," says Mr. LeBlanc, adding that the figures in question are in the hundreds of thousands of dollars.
With nothing in ink yet, Mr. LeBlanc and his team now hope to recoup some of the hit to their profit margin while they still can. "There are many benefits to going to the U.S.," Mr. LeBlanc says. "But we do not want to risk our strong domestic business by making a sizable financial mistake." What's more, they don't want to scare away the potential buyers by reneging on the original terms.
WHAT OUR EXPERTS SAY
Renegotiating a contract at the eleventh hour is never ideal, says Ben Hanuka, chair of the franchise law and litigation team at Goldman Sloan Nash & Haber in Toronto. Verbal agreements aren't always binding - generally, there's an understanding that there really is no deal until both parties have signed on the dotted line. Still, cautions Mr. Hanuka, shaking things up at the last minute sends the wrong message.
The key to renegotiating, he says, is to create a win-win situation for both parties. But first the party seeking to renegotiate has to broach the subject.
Cameron Herold, who led 1-800-GOT-JUNK?'s growth from 13 to 300 franchises during his seven-year stint before leaving the Vancouver-based company in May, says the best policy in such a situation is honesty.
"Tell them the truth," he says. "In the last 30 years the Canadian dollar hasn't moved this quickly. They need to just say up front that they can't afford to do business this way and suggest they find a way that works for both of them."
It's possible, adds Mr. Herold, that the buyers aren't aware of what the fluctuation in the Canadian dollar really means. "Most Americans don't even notice our dollar," he says. "Show them the data. Have a very simple one-pager with the numbers and a chart to help them understand that this is extraordinarily different than what we've seen before."
To show good faith, and to be genuinely fair, Mr. Herold suggests striking a deal that goes both ways. "If the dollar goes the other way, then it could be in favour of the buyer," he says. "Let them know you're not only looking out for yourself here." And, he adds, if the buyer's smart, they'll want to know that the deal is good news for the seller so that it doesn't weaken the company or hurt the brand.
But to avoid such a situation in the first place, Mr. Herold suggests negotiating in "absolute dollars," where one Canadian dollar equals one U.S. dollar, and building provisions into the model so that if currency fluctuates by 10 per cent in either direction, the bottom line is protected. "So long as the model works at one-to-one then the franchisor will be able to financially hedge on exchange rates."
Mr. Hanuka agrees transparency is the way to go in this case. But, he cautions, if the reason for the renegotiation is irrelevant to the deal, then it's not always necessary to be so forthcoming. It can just serve to complicate matters.
But whenever possible, if it is directly related to the deal, be up front about the request for renegotiation.
Once that's out of the way, there are a number of modifications to the original terms Propertyguys.com can make to help them offset some of the losses from the strong Canadian dollar.
First, Propertyguys.com could simply increase the licensing fee they're charging in exchange for a cut of the royalties they'll be collecting from the franchisees. And, since franchisees exist at this early stage, they can marginally increase the royalty fee they were planning to charge so that the dollars they're handing over to the territory developers aren't actually coming out of their coffers.
Other tactics are to increase the length of the agreement or to widen the territory area in exchange for increasing the licensing fee. Also, offering right of first refusal, where the territory developer has first dibs at any adjacent areas the franchisor wants to sell, can be attractive to a buyer.
Then there's the strategy of leaving the U.S. funds in the United States until the Canadian dollar weakens. That's a risk, because despite economic projections that indicate it's inevitable, there's no certainty if or when this will occur. "[Propertyguys.com] also likely needs the money to cover the cost of this expansion and can't just leave it there," Mr. Hanuka says.
Whatever tactic Propertyguys.com goes with, Mr. Hanuka suggests acting quickly. "Time is of the essence when negotiating," he says. "Each day that goes by the deal loses momentum and gives the buyer opportunity to look at something else."
Mr. Herold suggests any deal maker who runs into a snag like this get out there and talk to similar businesses about their experiences. "I'm sure there are dozens of people that have faced the exact same thing and could share their advice," he says.
If none of the above works, and the buyer balks, it's always a good idea to have a plan B. "I'm prepared to walk away from every deal," he says. "Do you really want to do business with people who draw a line this hard in the sand because of something nobody could have seen? Franchises aren't one-time deals. They're long-term partnerships."
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