When companies go into administration or liquidation, the impact can be really quite devastating indeed. We recently explored the ramifications of two large firms in big trouble, Carillion and Toys R’ Us and - especially in our Carillion article - we explored just how far reaching that impact can be. Creditors, employees, subcontractors… The collapse of a business can affect many different people, to varying extents.
How about if the company is a franchisor, though? And you’re a franchisee? Then what happens?
Let’s look into this senario, shall we?
When you enter into a franchise agreement, you’re effectively setting up your own business, albeit under someone else’s banner. For a fee you become an affiliate dealer that distributes the product or service of the franchisor, getting to use their name and receiving all the benefits that comes with that. But that does leave you exposed to a rather unusual risk - if the franchisor goes broke, your business is in trouble too. Regardless of how well you run it.
Bargain Booze & Wine Rack’s collapse
This was the exact situation recently faced by all franchisees that operate under the Bargain Booze or Wine Rack brands. The parent company, Conviviality, entered administration after weeks of seemingly teetering on the edge of an insolvency cliff. Falling sales and a massive £30m tax bill slapped on their desk by HMRC left the business reeling and third party advisors became involved.
All this left Bargain Booze and Wine Rack franchisees extremely worried indeed. And understandably so.
So what is to become of those people running franchises for Conviviality? Well, it’s hard to say at this precise moment in time with any real degree of certainty. The company is in good hands though, with PricewaterhouseCoopers appointed as administrators. The company’s just been sold to UK grocery retailer Bestway for £7.25 million, so perhaps the buyout can turn around the fortunes of the cut-price alcohol firm and things will start to look up. For the sake of the franchisees, let’s hope that’s the case. Should it not be the case, however… It might result in rather sticky times for those operating the company’s shops.
What to do if your franchisor goes bust
Let’s talk in more general terms. A franchisor goes fully bust. They liquidate the company. The business’ assets are sold off to pay their creditors any money that’s owed. One of the main assets they hold is the brand name (which the liquidator may be able to sell on as an asset). Now, all franchise agreements in place are void, so the franchisee is no longer obligated to do anything, really. The franchisees can continue trading, only not under the franchise brand name as they don’t have an agreement in place to use the name. They’d have to rebrand unless they could reach an agreement to use the brand name by purchasing the Intellectual Property.
That may sound ambitious, but it’s possible for a union of franchisees to club together and cooperatively purchase the IP for the brand name.
Depending on the nature of the business, this change may not be huge. A period of adjustment would be needed and a fair amount of paperwork filed and work carried out, but some (now former) franchisees, now they’re experienced in the industry, may actually thrive on their own. The freedom of no agreement and no fees may mean that the collapse of the franchisor turns out to be a blessing in disguise. But if the franchise is heavily reliant on the franchisor or generally very dependant on the brand in order to trade, they may well have to wrap up their business entirely.
Franchisees that decide to carry on trading need to be aware that they may no longer receive the kinds of deals and discounts from wholesalers or suppliers that they once enjoyed. Now the ‘brand’ effectively doesn’t exist, the relationship they had and the huge orders they received no longer exist too. So you may have to renegotiate terms and figures.
If you operate a franchise and the franchisor is experiencing difficulties or goes into administration or liquidation, it can be troubling time. Our advice is to speak to them. Be it the company itself or the third party that’s brought in, get in contact. The Insolvency Practitioner in charge will be only too pleased to help you.
If you don’t feel comfortable speaking to them, talk to us. We can help you and discuss your position with them on your behalf.