Help! My franchisor has gone bust – What now?
Franchising has a number of advantages for both franchisor and franchisee. One of which, centred around the fundamental principle of franchising, is that franchises replicate a tried and tested business model and therefore are thought to be a more stable economic bet than entrepreneurial ventures. This is often the case and is reflected in the franchise agreement being seemingly one-sided in the franchisors favour. Most deal with the situation where a franchisee cannot pay their way but very few deal with what happens if the franchisor finds themselves in difficult circumstances.
So, what if your franchisor goes into administration?
If it is suitable for the company to do so, the initial step will be to put the company into administration where administrators will take over management of the business and the primary objective is to turn the company’s fortunes around. Franchisees will still be bound by the terms of their agreements including the basic obligation to continue trading.
If franchisees with sufficient capital are on hand, there may be the opportunity to buy out the business. If this is of interest, however, urgent action must be taken before the company starts to break up or external buyers swoop in. In this case, it is imperative to carefully assess the liabilities that would be taken on and experienced advisors should be contacted.
If external buyers take interest and look to buy, while it is expected they would aim to fully understand the franchise arrangements and the likely responses of the franchisees, in most cases, franchisees would not have a say or be able to stop the sale of the franchisor from happening and it is important to note that all franchise agreements will still be valid and legally binding, sold as part of the company’s value. This can be seen as an ideal situation for franchisees that are happy with their arrangements as it is business as usual.
If administration fails or isn’t appropriate, the only other option is liquidation. What happens then?
The primary focus of liquidators is to wind down the business and sell of the assets to the highest bidder. In this case, a franchisee might wonder what happens to their agreement as the franchisor is entering an insolvency process. Essentially, the franchise agreement is null and void as the franchisor is not able to continue its obligations and it could therefore be argued that it is a repudiatory breach. This can therefore bring the franchise agreement to an end.
Liquidation of the franchisor can mean different things to different franchisees. Experienced franchisees might have a silver lining in the chance to carry on without ongoing fees but asset-reliant franchises may struggle to continue without their suppliers and those with unpaid loans might find the assets recovered by the liquidators. Equally, junior members will not feel they have received much in return for their substantial investment when joining the franchise.
As part of the bundle, the liquidators will sell the Intellectual Property (trademarks and copyright) used in connection with the business, so franchisees who wish to continue trading under the same brand would have to acquire the relevant intellectual property. Whether this is an option or even a possibility is dependant on the franchisee and the IP involved.
Franchisees who have taken an underlease for premises from their franchisor should also think about their position and may be able to negotiate improved terms directly with the landlord.