Purchasing a franchise is a big decision. For a franchisee, their success or failure depends in large part on the reputation and success of their adopted business. Unfortunately, it’s all too common for franchises to fall apart, leaving their franchisees in dire trouble. You might remember the saga of Pie Face, or the appointment of administrators to Eagle Boys Pizza.
So what happens when a franchise goes bankrupt or bust?
Who owns the Intellectual Property
Often, the intellectual property associated with a franchise will not actually be owned by it directly. Intellectual property comprises things like brand, trademarks, business names. In many cases, a separate company is usually set up for the sole purpose of owning the intellectual property. This company then ‘licences’ the use of the intellectual property to the franchisor. If problems arise with the business, then the IP holding company can sever the agreement. This protects the intellectual property itself, but can cause problems if franchisees want to continue to use it.
A good way to avoid this is to negotiate an agreement between the IP holding company which covers what happens if a franchise fails. This can allow the franchisee to continue trading under the brand name, even if the franchise fails.
What are the franchisee’s rights under the Franchise Agreement?
In the majority of cases, very little. Most Franchise Agreements don’t protect franchisees from problems arising with the franchisor. In fact, common practice dictates that only the franchisor will be able to sue for insolvency etc.
If the franchisor does fail, and there is no agreement between the franchisee and the IP holding company, things can get messy. In this case, a franchisee will have no choice but to ‘wait and see’.
If you are a franchisee, the most prudent thing to to is arrange for some protection under your Franchise Agreement. It is possible that such an agreement might be dismissed by an administrator, but nevertheless, it might help you get out of a tight spot.
If you purchase most of your products from the franchisor, you could also run into difficulty buying goods. In the event of a cataclysmic failure, you might be left trying to source goods and services through third parties. The same holds true for equipment,
If administrators and liquidators are appointed, they have the power to cancel some Franchise Agreements. Another possibility is that the liquidator or administrator may attempt to sell the whole of the franchise system. In that case, the franchisee will be effectively sold off to a new franchisor as part of the deal. During the sale process, the franchisee will be obliged to pay ongoing franchise and marketing fees to the liquidator.
If administrators and liquidators cannot find a purchaser, franchisees may be forced to close the doors and walk away from their businesses. The franchisee could continue operating their business under a new name, but without the goodwill attached to the franchise, this could be hard work.
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