We have elsewhere commented on the Disadvantages of buying a Franchise.
Another factor for prospective franchisees to keep in mind is that franchisors themselves are not immune from failure.
Franchisor failure not only has a potential adverse effect on franchisees within the franchise network, such failure also negatively impacts banks, landlords, suppliers and other stakeholders in the franchise system.
There are a number of franchise systems that operated in Australia and which ultimately failed and either had administrators or liquidators appointed or needed to re-structure. These include, for example:
the jewellery chain – Kleins;
the Traveland chain of travel agents;
the delicatessen chain - Cut Price Deli;
the white goods company - Kleenmaid Group;
the car care company - Midas Australia;
the furniture retailer – Samsara;
Caltex stepped away from their franchise model;
the pastry chain - Pie Face
These are just a sample.
It is important to note, however, that the collapse of a franchisor does not inevitably lead to the brand evaporating or in fact that franchisees will also fail. For example, a number of Traveland franchisees were able to continue operating either on their own account or as part of other travel agent chains. Some franchisees in other situations were able to form buying syndicates to acquire the franchise system and intellectual property and continue trading.
But, not all franchisees are so fortunate. An insolvent franchisor can potentially lead to loss of the right to operate the franchised business, termination of the franchise agreement and/or other repercussions.
The lesson from these failures is that franchisors and franchise systems are not immune from harmful internal and external forces. As such, if you are a prospective franchisee you should undertake a thorough due diligence and obtain appropriate legal, financial, business and accounting advice before signing a Franchise Agreement.
In simple terms, insolvency occurs when the franchisor is unable to pay its debts when due.
Most franchisors are corporate entities so an insolvency event occurs when the franchisor company enters administration, goes into liquidation, or a receiver is appointed.
Where a franchisor becomes insolvent such event can have a serious impact on a franchisee’s franchised business. For instance:
where the franchisor holds the head lease and has granted a sublease or occupancy licence of the premises to a franchisee, the franchisee may well be in a vulnerable position as the landlord could enforce its rights against the franchisor terminating the head lease and thereby the franchisee's sublease or occupancy licence - the effect being the franchisee losing their right to occupy and use the premises
if the franchisor owes money to suppliers, those suppliers may refuse to supply products needed by the franchisees to sell to consumers
insolvency of the franchisor may adversely affect the reputation of the whole franchise network and the brand in the minds of consumers
the franchisor maybe unable to provide necessary internal management franchisee support functions.
Did You Know?
Most franchise agreements do not include clauses that deal with franchisor breach or franchisor insolvency.
The Franchising Code of Conduct also does not deal specifically with the insolvency of the franchisor.
If you are a franchisee and a franchisor fails, you could be left in a vulnerable position once an administrator or liquidator is appointed to the franchisor.
Get Legal Advice
It is important for the above reasons to engage specialist franchise lawyers, such as, Greyson Legal to:
review and advise you on the franchise agreement; and
assist you to negotiate appropriate amendments,
before signing any Franchise Agreement.