What to do if your franchisor becomes insolvent…

When you enter into a franchise agreement, you are essentially setting up your own business (albeit under an established name).

However, the arrangement means that if the franchisor gets into financial difficulty, the franchisees are likely to be impacted too.

This is what happened recently, when Bargain Booze’s parent company, Conviviality, entered into administration, after being faced with a decline in sales and a hefty tax bill.

What happens when a franchisor enters into a formal insolvency?

If a Franchisor enters into liquidation, a licensed insolvency practitioner will be appointed to deal with the administration of the company’s liquidation.  The role of the insolvency practitioner, acting as liquidator in this instance, will be to sell the company’s assets for the benefit of the company’s creditors.

In these circumstances, it is often the case that the primary asset is intellectual property in the form of the brand name itself (and the goodwill associated with it).  As such, the liquidator is likely to facilitate a sale of the brand name.

Once the company enters into liquidation, franchisee agreements cease; the franchisee can continue trading but is prohibited from using the brand name.  This presents franchisees with two options:

  1. REBRAND
  2. PURCHASE THE BRAND NAME

Both options would allow former franchisees the opportunity to trade on, without the restrictions of a franchisee agreement.

If a franchisee has been heavily reliant on the franchisor for guidance / assistance with running the business, they may not have the experience necessary to operate alone.  In addition, it may be necessary to renegotiate the terms of agreements in place with suppliers / wholesalers; the existing relationships are likely to have developed because of the large orders being placed by the franchisor.  Indeed, the franchisee may not even HAVE a relationship with the necessary suppliers / wholesalers.

If individual franchisees are not in a position to make an offer to purchase the intellectual property, one option is for a number of franchisees to ‘club’ together in order to make an offer on the basis of a shared interest.

Should you wish to discuss your situation with us, please get in touch for a free consultation.

Contact us now: 01782 828 733 | enquiries@dunionandco.com