Face up to facts early to avoid a crisis situation

Winding up a business is never easy, but when you're winding up a franchise business, a whole set of issues comes into place that wouldn't necessarily arise with a 'non-franchise' company.

Face up to facts early to avoid a crisis situation

Face up to facts early to avoid a
crisis situation ……

Winding up a business is never easy,
but when you’re winding up a franchise business, a whole set of issues comes
into place that wouldn’t necessarily arise with a ‘non-franchise’ company.  We all know that you’re exposed to risk if a
franchisor goes bust, but as a franchisee, what happens if your business gets
into trouble? Are there any issues specific to franchisees that you should
consider? Here, Paul Formby, head of insolvency and corporate recovery at Cheshire
law firm SAS Daniels, explains all.

Preparation is key

As always, knowing all the facts before you enter into a franchise agreement is vital.  When a franchisee can’t pay its debts and enters insolvency, the franchise agreement is generally terminated as a matter of course.  Agreements and terms vary, but this ‘automatic termination’ clause is pretty standard. However, what isn’t standard, is the support that you receive before you reach this point. It’s likely to vary considerably, depending on the franchisor. 

Before you take on a franchise business, make sure you’re clued up about who is on hand to help should you experience cashflow challenges – will there be advice/experts to step in?  Try and get a feel for this and ask lots of questions before you leap in.

There may well be clauses in your contract which outline the technical and commercial assistance that will be on offer to you in this situation- make sure you fully understand and use this assistance if you need it further down the line.  It’s unlikely that the franchisor will help you come up with a new business plan if you experience difficult times, but they may well be able to give advice on business issues that they have experience of such as managing costs or strategies to increase profits.  Flag up any concerns early, even if it is a difficult month.

It’s a challenging situation for franchisors to navigate, as well as the failing franchisee.  If a franchisor takes no initiative to help you, it may well be liable for losses to the company and creditors further down the line.  On the other hand, if they step in and get too involved in the management of the franchise, they could also be held liable and risk having to pick up the debts of the bankrupt company. 

Get advice as early as possible

If you find your franchise is in financial difficulty, the earlier you seek expert advice, the more options will be available to you. In a franchise agreement, the franchisor tends to have control over the proceedings, so making sure you’re armed with your own, independent professional advice and representation is key.  The top priority of the franchise owner will be the protection of their brand.  This will affect the way they handle the situation and may not always be to your advantage. 

Complex issues

Winding up a company in a franchise agreement can be complicated with lots of issues that wouldn’t be a factor with a ‘standard’ liquidation, bringing a whole set of unique challenges.   

With a non-franchise business, the business and assets may be transferred another entity (for value) before the original company goes into a formal insolvency process.  In the case of a franchise business, original clauses in the franchise agreement will state what will happen in an insolvency situation and the engagement of the franchisor is fundamental.

Early advice is crucial

My key recommendation is to take professional advice early.  This will mean you have more options on the table.  If the situation escalates and turns into a crisis, those options are taken away.  Knowing all the options as early as possible will enable you to make strategic decisions to put you in the best position further down the line. It may also identify solutions to the problem and shows initiative in the eyes of the franchisor. 

If it turns into a crisis management situation, your options will be limited. 

All is not lost

It goes without saying that you should get a full understanding of the prospect of the franchise prior to entering into an agreement.  However, if your franchisee is unsuccessful and you’ve been misled by a franchisor on the prospects of the business, they may well be liable for damages.  Likewise, if there has been a lack of information, or information you received has been inaccurate, and has led to your downfall, the franchisor may have to take some of the responsibility. 

Even though the very essence of entering into a franchise agreement means you’re limiting the risk of an insolvency situation, you’re still open to the risks of business failure. Do everything you can to avoid this situation and if it happens, get advice early so you can weigh up your options and make the most informed decision. 

Paul Formby
Paul Formby