What Happens If Your Franchisor Goes Bust?

12/03/2018 08:00 | Start a business

What happens when the franchisor goes bust?

You did everything right. You followed advice and performed your due diligence before signing the franchise agreement. You entered the contract feeling confident that the franchisor had developed a robust franchise system and established a trusted and recognisable brand name.

So, what happens, if despite all this, the franchisor goes bust? Suddenly, the factors that had made this one of the best franchise opportunities for sale are deemed worthless now that the franchisor has gone out of business. There are so many questions to answer. Can you keep using the system? What about the brand? Is your territory still exclusive?

Unfortunately, its difficult to answer these questions as the answers will depend on the reasons why the franchisor has had to shut up shop. This can be a worrying time, and although it happens very rarely, it is a risk that comes with buying into a franchise.

What is the franchisor goes into administration?

If the franchisor does experience financial difficulty, the first step will be to put the business into administration. At this point, the administrators take control of the franchise as they attempt to save the company from failing. As a franchisee, you're still obliged to adhere to the terms of the franchise agreement and continue trading.

If you have adequate capital and have a desire to buy out the business, this could be one of the franchise opportunities for sale that youve been waiting for. A word of warning though, you must consider the pros and cons of taking over the business and consult professionals before you take any action. Having said that though, you should let the administrators know your intentions as soon as possible before external buyers start to show an interest.

If an external buyer does buy the business, you will have no say in whats happening as a franchisee. The good news is that the business would be sold as a franchise and your contract would still be valid. For many franchisees, this is the best possible outcome as they can continue to own and operate their franchise under the same terms as they were before the franchisor went bust.

What if administration isnt an option? What next?

If administration isn't suitable for the business, or you fail to find a buyer, then the next step is liquidation. The main aim of the liquidators is to sell off the franchises assets to the highest bidder. In this situation, your franchise agreement becomes invalid as the franchisor is not able to continue their obligations. Therefore, the franchise contract ceases to continue.

Depending on how experienced you are as a business owner or franchisee will determine how you may react to your contract coming to an end. If youre very experienced and confident in your abilities to run your own independent business, then this situation gives you the chance to continue trading without having to pay ongoing fees to the franchisor. However, at the other end of the scale, if youre new to franchising, then the thought of going it alone may be too daunting to become a reality. You may also be in a difficult financial state because you have recently invested in the franchise, but as yet have not reaped any of the rewards of being part of a franchise system.

What happens to the intellectual property?

As part of the liquidation process, the intellectual property associated with the franchise will also be sold off.

  • Brand
    If you and some fellow franchisees wish to club together, you could potentially buy the franchisors brand and trademarks.
  • Territory
    When the franchisor disappears, so do your territorial rights. This may not be an issue if you decide to continue trading, it depends on the nature of your business and your location.
  • Suppliers
    When a franchise system dissolves, suppliers are under no obligation to continue offering the benefits that former franchisees will have previously enjoyed.

What about the system?

The value of the franchise system will again depend on what type of business you run. For some franchisees, there may be many of the elements of the business, such as operating procedures, that will continue to remain the property of the franchisor. Unlike a trademark that can be purchased or a supplier that can be negotiated with, the system is a more difficult challenge to overcome.

Before you start trading independently, understand what aspects of the business format are deemed out of bounds, and which youll be able to continue applying to your newly evolved business. You dont want to start your next venture with the cloud of legal issues hanging over you because your former franchisor decides to take you to court.

What should you do if youre ever faced with an insolvent franchisor?

  • Work together
    Its in your best interests to cooperate with the liquidator or the new buyer of the franchise. In such circumstances, there are many risks, so working together may help to maintain goodwill at this crucial time. By building relationships, you'll also be more likely to be kept updated throughout the whole process.
  • Act fast
    The sooner you touch base with key contacts within your business the better. Speak with your suppliers and landlord to make sure that your payments are up to date. You dont want your business to suffer as a result of the franchisors financial difficulties.

There are so many things to take into consideration if the franchisor folds. These can be tough to deal with, especially with the emotion of the situation thrown into the mix. In an ideal world, the franchisor would give you plenty of notice if they are experiencing difficulties and want to help their franchisees as much as possible.

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