What to do when a franchisor goes bust

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There are rules governing early exits from a business. Image: blindgossip.comWhat happens if my franchisor goes bust or sells their rights? Is it the end of the world? No, however it is unsettling to franchisees and can create some concern and unrest.

Franchisees are often attracted to a franchise brand or system by the enthusiasm and vision of the founder, who may have been the face of the brand and quite hands on, met and approved franchisees. The founder may have had a direct role and interest in supporting franchisees in the early years.

The founder may then delegate the franchise support to a management team, take a step back and sell their rights in the franchise system.  This can mean significant change to the brand, the system and culture of the system.

The new franchisor or equity owners will be focused on ensuring a return on their investment.  They may introduce new ideas that may be considered positive or negative by the franchisees.

Change can be liberating but for some, change is the unknown and can be frightening. The way in which this change occurs and how the change is communicated by the original franchisor and its management team will largely determine whether franchisees react positively to the change of ownership.

Communication by the franchisor is just as important as acceptance by the franchisee.

The new owner may be more diligent in enforcing franchisees’ obligations and require more accountability from franchisees in an effort to improve the system as a whole.  This can lead to disillusioned franchisees. While some will stay for other franchisees it is the catalyst to get out.

It is also the opportunity for the new franchisor to identify non-performing franchisees and negotiate their exit and develop those franchisees that can adapt and build on the brand and system.

Most franchise agreements will have a provision that enables the franchisor to assign or transfer its rights to a third party without the consent of the franchisee.

A franchisor can sell or assign its rights in a number of ways:

  • By selling its rights to operate the system (the brand, intellectual property and assets) to a third party. 
  • By a transfer of its shares in the franchisor company or a majority of shares to a third party.
  • The franchise rights may be sold to a third party that operates a number of different brands and systems under a corporate management model.
  • The franchisor may be wound up and a liquidator appointed who will sell the franchise rights to a third party. 

Franchisor obligations

As this is an important event that will effect the franchisees, the franchisor has an obligation under the Franchising Code to advise a franchisee in writing within a reasonable time (but not more that 14 days) of its change of ownership or control of the business, or a change in ownership of the intellectual property.

It’s a good idea to request a copy of the agreement  the franchisor signed with the new owners, however the franchisor is under no obligation to provide this to franchisees.

The franchisor in liquidation

Franchisees often believe they have a right to terminate their franchise agreement where a franchisor goes into liquidation – that is not the case. The franchisee has no right to terminate the franchise agreement except in the unlikely event the agreement includes an express right for the franchisee to do so.

The liquidator takes control of the franchisor company and can enforce the rights against franchisees. The franchisee must continue to pay royalties and adhere to the franchise system. The liquidator will quickly try to find a purchaser to acquire the rights and in some circumstances, they may offer the rights to existing franchisees.

Franchisees continue to be contractually bound to meet their obligations under the agreement and the liquidator can enforce the franchisor’s rights against the franchisee. The franchisee can only transfer its rights or sell the franchise business with the consent of the franchisor.

So when a franchisor sells or goes 'belly up' the franchisee will be required to continue operating under its franchise agreement.

Although a franchisee will continue to be bound by the terms of the franchise agreement, it should be borne in mind that the new franchisor will also be required to meet its obligations as a franchisor under the Code.

In the case of a well established franchise system, a change in ownership may have little or no impact on franchisees.

Although there will be a period of adjustment, franchisees should keep in mind that a new franchisor will hopefully be looking to improve the system and this will ultimately benefit everyone.

Robert Toth

Robert Toth is franchise partner at Marsh & Maher Richmond Bennison. Robert is a Business Law Accredited Specialist, a member of the International Franchise Lawyers Association (IFLA), and a member of the Australian Institute of Company Directors. View More...
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