In the current economic environment more than ever it is vital that franchise brands review their requirements for franchisee security. Risks taken in a more buoyant economy should not be considered now.
Avoid the disappearing franchisee problem
A key part of onboarding franchisees is ensuring that the franchise agreement is entered into. Where this is signed by a corporate franchisee that is a newco there is a risk that if the franchisee fails to perform it can absolve itself from liability by simply choosing to liquidate the company.
It is therefore vital that franchisors take additional security from the owners of the business ideally in the form of a personal guarantee or if a personal guarantee cannot be given that they provide letters of credit or a parent company guarantee.
Make sure it is enforceable
For a guarantee that is provided to be enforceable certain formalities must be complied with. The guarantee should be executed as a deed. This means that those who sign it must have their signature witnessed by someone who is independent, over the age of 18 and has all their mental faculties.
Conduct due diligence
It is also important to conduct due diligence to ascertain what assets the guarantee can be enforced against. If the Franchisee does not have any assets then the guarantee or threat of enforcement of the guarantee will not work.
The process of enforcing a properly executed guarantee is relatively straight forward and far more cost effective than other methods to recover straight forward debts owed.
Recognise the ranking risk
However note once started the winding up petition may well bring forward others that are owed money by the franchisee company whose right to payment ranks in priority to yours. This would apply if monies are owed to HMRC by the franchisee company or if it has other secured debts to a bank. This is why it is a useful tool to use as leverage to secure payment but not necessarily file.
Ensure asset holders give the guarantee
It is also worth considering who gives the guarantee. In whose name are the personal assets of the owner of the franchisee company? Sometimes this may be a spouse or other family member. Due diligence should be carried out to check this out. Where assets are held in the names of others those individuals should also sign guarantees so that you have protection that bites.
Brands that are new to the UK or emerging franchise concepts can often waive PG requirements or agree to caps. These concessions should be carefully considered as the consequences are a reduction in the remedies available to you if there is a breach of the agreement.