What happens when franchisors fail?

  • Opinion
  • March 9, 2017
  • Lizandra Bailey
What happens when franchisors fail?
Illustration: Kerryn Smith

If you are a franchisee, it’s possible that the main reasons you purchased your franchise were because you were attracted to the brand, system and support offered by the franchisor, and the success that these attributes implied. Possibly, the initial costs associated with the purchase of your franchise business amounted to hundreds of thousands of dollars.

You would, no doubt, be very concerned if there were issues with your franchisor’s solvency. You have a lot to lose if your business fails.

In recent years there have been a number of franchisors that have gone into liquidation or receivership. Examples include Nando’s (in that case it was the New Zealand master franchisee, not the Australian franchisor); Stonewood Homes; Video Ezy and United Sweets. And then there is the recent case of Nosh, where the franchisor is now looking at closing the stores.

Is it the end of the world if your franchisor goes into liquidation or receivership? No, not usually. In most situations the liquidator or receiver manages to find a third party to purchase the franchisor’s assets including the franchise agreements. Until this happens, you might find yourself in limbo and experience some upheaval.

While the receiver’s role is to try to rescue the franchisor’s business as a going concern so it can continue to trade, a liquidator’s role is to wind down the business and sell the assets so that creditors can be repaid. The receiver or liquidator can also sell the franchisor’s business without your consent. 

We are often contacted by franchisees in this situation with concerns about the impact of franchisor solvency issues on their business. Often franchisees ask us if they can terminate their franchise agreement and rebrand? They also ask us if the non-competition restrictions in the franchise agreement still apply.

The answer is no - most likely, you cannot terminate your agreement. The liquidator and a receiver will take over the management of your franchisor’s business - this means they can enforce the agreement against you if you fail to comply with your obligations (including any non-competition restrictions).   

But here’s the silver lining - it is entirely possible that a change in franchisor could be the best thing to happen to your business in a long time. It is likely that the new franchisor will have a detailed awareness of what the issues were and will be motivated to ensure the success of the franchise system going forward so that it gets a good return on its investment. This can only be a good thing for the franchisees.

If no purchaser is found by either the receiver or the liquidator (or in the case of a receivership, the receiver is unable to rescue the business), the franchisor company will be wound down and the franchise agreements will come to an end. This could be seen as an advantage to some franchisees, who see the benefit of continuing without the fees, but of course the downside is the reputational damage that this will have on individual franchisee’s business and the lack of ongoing support. Thankfully the likelihood of this occurring is extremely low.

If you are a franchisee and your franchisor goes into liquidation or receivership – don’t panic! It is important that you keep your focus on business as normal and respect your obligations under the franchise agreement. It is likely that the upheaval you experience will last for a limited period and there is every chance that the new franchisor who will have a new vigour and energy about the system.

This story originally appeared in NZ Retail magazine issue 748 February / March 2017

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