What happens to franchisees when a franchisor fails?

Fortunately for the reputation of franchising in the UK, this happens very infrequently.

When a franchisor decides franchising is not the way forward, having recruited franchisees, generally, such a franchisor cannot immediately withdraw from franchising. It has to serve a reasonable period of notice on franchisees, which is usually not less than five years.

If, however, a franchisor is in financial difficulty, what happens to franchisees will depend on how serious the franchisor’s financial issues may be.

If a business is insolvent, there are various options. Liquidation arises when the franchisor is insolvent and the insolvency practitioner does not believe it can be sold as a going concern. In this scenario, the assets of the franchisor’s business are sold off.

The assets a franchisor has are the brand and the franchise agreements, although on a liquidation, franchisees will be able to argue their franchise agreement has come to an end and that they’re released from any obligations.

In other words, franchisees would be able to carry on their business. What they wouldn’t be able to do is carry on using the franchisor’s brand, because that’s an asset the liquidator may want to sell.

If a receiver is appointed, a purchaser for the franchisor’s business will be sought because the value of the business as a going concern is likely to be higher than the value of its assets. As a result, the receiver will continue to operate the business.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.