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Support, Support, Support

Written by Damian Humphrey on Tuesday, 19 May 2020. Posted in Analysis, Legal

There is no doubt that the current Covid-19 pandemic has had a profound effect on the franchising industry.

Support, Support, Support

There is no doubt that the current Covid-19 pandemic has had a profound effect on the franchising industry, with the Government lockdown at the end of March 2020 resulting in franchisees across the country either having to cease operating their business or having to operate their businesses on a restricted basis.

The principle obligation of a franchisor to its franchisees is to provide support and guidance. This has become ever more critical over the last few months and anecdotally a majority of franchisors have excelled in ensuring their networks not only survive but are well placed to exit the current lockdown strongly and in a position to steal a march on their non-franchised competitors. Here we look at the ways in which franchisors have been supporting their networks and how they might continue to does so, to enable their franchisees to thrive.

Management service fees concessions

For many franchisors, no doubt, one of the first questions asked by their franchisees was whether they were prepared to offer management service fees concessions.

Obviously for those networks that ceased to trade entirely, leaving franchisees without any earnings, franchisors likewise have had to adapt and take steps to be able to continue to support franchisees without income. Within networks that have continued to operate either fully or on a restricted basis, many franchisors have offered concessions, which have included MSF reductions or holidays.

Where franchisors have given concessions, careful consideration will need to be given as to when these are removed or reduced. Those franchisors which entered into this crisis in a strong financial position will be better placed to offer this support for longer. However, the desire to financially assist franchisees, at least in the short time, has to be balanced with the franchisors need to ensure their financial stability at a time when its franchisees will, for some time to come, need a greater level of support.

Cash flow management

For all businesses, the nature of the pandemic and the measures taken by the Government to protect the public from its devastating effect have meant that even the most financially robust franchisees, without proper cash flow management, will be liable to fail.

1.         Business plans

Most franchisors, as a matter of course, require their franchisees to update business plans annually. Franchisors have been, or, if not, should be working with their franchisees to prepare revised business plans to manage their cash over the coming months. This will enable franchisees not just understand how it will affect expenditure on a personal level but to understand the extent to which they need to access the financial assistance and reliefs made available to businesses by the Government.

2.         Bank support

Franchisors should be working with franchisees to arrange one or more of the schemes available from banks to provide financial support during this crisis. These include repayment holidays on existing credit lines, access to both the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).

Where franchises are taking the opportunity of a repayment holiday on existing loans, franchisors may wish to consider extending the term of franchise agreements to mirror the increased length of the banking facilities.

3.         Employees

At the start of the crisis the Government was quick to introduce the Coronavirus Job Retention Scheme enabling employers to furlough some or all of their employees, receiving 80% of such employee salaries (subject to certain financial caps) back from the Government. Franchisors have been working with their franchisees to enable them to benefit from this scheme by seeking guidance on its affect and implementation and disseminating that information down to its franchises.

No doubt however, the more challenging task for franchisees will be managing the return to work of those staff on furlough as the Government’s support Is reduced. Franchisors will need to help franchisees deal with the practical and financial challenges of this, including potentially the redundancy of parts of their workforces. Franchisors should consider, where not already available, accessing external advice for their franchisees to handle these issues as smoothly and painlessly as possible. 

4.         Rent

For premises based franchisees their biggest expenditure is often rent. The Government moved swiftly to stop landlords from forfeiting (or terminating) a lease due to non-payment of rent due on 25 March 2020 (or other rent arrears) and recently announced that it was introducing the Corporate Insolvency and Governance Bill 2020 which, among other measures, will introduce a ban on statutory demands and winding up petitions being presented (up to 30 June 2020) where businesses cannot pay debts, including rent due to COVID-19. However, it is crucial that franchisors, if they have not done so already, work with franchisees to negotiate concessions with landlords. Such concessions may include switching to monthly rather than quarterly payments, agreeing to defer rent or offering rent free or discounted rent periods.

Adapting the system

One of the cornerstones of successful franchising is the franchisor’s ability to continually evolve and adapt the system to ensure the network is able to grow its market share.

Given that social distancing is likely to be with us for some time, even for networks where the fundamental model is unlikely to change, franchisors will need to quickly find new ways to operate the business, whilst complying with current restrictions and social distancing guidance in order to maintain the health and well-being of all its stakeholders and the public at large.

For other networks however, we are seeing and will no doubt continue to see, the emergence of new and innovative ways of delivering services and offering new products to both retain and increase their customer base. Many of these changes involve the use of technology and to some extent the Coronavirus has acted as a catalyst for change that was already happening.

Final thoughts

There is no doubt that franchisees will have benefited from being part of a network during this crisis. The plethora of actions that have needed to be taken and information needed to be absorbed in order for businesses to just to keep afloat will make it virtually impossible for some independent businesses to survive.

Furthermore, we are likely to see an increase in interest from new franchisees first, in sectors that have either been “Covid-proof” or are likely to flourish in the foreseeable future and secondly, in networks which are truly able to demonstrate that they have innovated in a way that means they are not just able to survive the current crisis but can flourish as we exit out of it.

About the Author

Damian Humphrey

Damian Humphrey

Damian heads up Ashtons Legal’s nationally recognised franchise team, which provides a first-class service to many of the country’s leading franchise brands. His work involves helping franchisors set up and grow their franchise networks with a particular emphasis on helping franchisors expanding their brands internationally.

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