A step by step guide to franchise liquidation

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How to liquidate a company when in a franchise agreementInsolvency can be a challenging and stressful situation for both franchisees and franchisors. In such situations, seeking expert advice and guidance from insolvency practitioners who specialize in franchise businesses can be crucial.

For franchisees, it is important to understand their legal and financial obligations and explore all available options, including negotiating with creditors, restructuring the business, or even selling the franchise.

Franchisors, on the other hand, may need to assess the financial health of their franchise network and take appropriate measures to support struggling franchisees, such as providing financial assistance or implementing changes to the business model.

Ultimately, seeking professional insolvency advice can help both franchisees and franchisors navigate complex legal and financial issues and find the best path forward.

Liquidating a company that is bound by a franchise agreement can be a complicated process. It is important to first review the franchise agreement and determine what obligations must be fulfilled before proceeding with liquidation. The franchisor may require certain notifications and approvals before liquidation can take place.

Additionally, any franchise agreements and obligations must be terminated and settled in accordance with the terms of the agreement. The franchisee must also notify its customers, employees, and other stakeholders of the liquidation and any impact it may have on their relationships.

What is the franchise relationship?

The franchise relationship is a brilliant business model that allows a budding business to take advantage of the reputation and expertise of an established business. This arrangement benefits both parties as the franchisee gains access to the business model and branding, while the franchisor expands its own brand name.

To ensure a smooth and seamless partnership, a comprehensive franchise agreement is vital. In the UK, franchise agreements are not subject to specific regulations, but there is self-regulation from the British Franchise Association (BFA) that enforces rules and ethics for member dealings with franchisees.

It is essential to conduct extensive research before entering into a franchise agreement with a non-BFA member. The franchise agreement typically states that the franchisor owns the assets, which are leased to the franchisee rather than transferred into their ownership. As a result, the impact on the insolvency of a franchisor can be significant, and careful consideration must be taken to minimise any consequences.

Insolvency of franchisor

When a large franchise enters formal insolvency, it is more likely that administration or a company voluntary arrangement will be implemented. This is due to the complexity of the franchise business and the need for smooth dealings with the franchisees.

Due to the intricacy of the industry and the requirement for orderly interactions with the franchisee, this is the case. Franchisee insolvency are far more frequent than those of the franchisor. Nonetheless, in the event of certain insolvencies, the franchisee must communicate with the administrator to determine:

  • Will the franchise branding find a buyer?
  • Will the franchisor still provide equity in the future?
  • Do they need to be notified of any additional business halts that may occur?
  • Is it possible to purchase the assets leased to the business and reorganise it as an independent entity?

In the event of a franchisor insolvency, franchisees must liaise with the administrator to determine the potential impact on their business, such as continuity of stock supply and potential business interruptions. It may also be possible for franchisees to purchase the assets they are currently using and set up as an independent business.

In the case of pre-pack administration, a new owner may be in place before franchisees are aware of the insolvency, and franchise agreements may be transferred to the new company as an asset. It is essential to seek independent legal advice if any doubts arise regarding the implications for franchisees.

Insolvency of a franchisee

It happens considerably more frequently for franchisees to declare formal insolvency. Owing to the franchise agreement, there will typically be a voluntary liquidation of the creditors. There are various factors that support this conclusion:

  • The stock and other assets that the company uses are probably the franchisor’s property. There is probably nothing to sell in order to support administration.
  • There will probably be a break clause for insolvency in the franchise agreement. This makes it conceivable for the franchisor to end the contract, ruling out the possibility of a company-voluntary arrangement.

While the above points apply in most cases, there may be instances where other options are available. However, if a creditor issues a winding-up petition against the company, compulsory liquidation may be the result. In the event of formal insolvency, it is advisable for franchisees to take control of the situation wherever possible, given their relationship with the franchisor.

If intending to start a new business after entering voluntary liquidation, it is essential to involve the franchisor at an early stage to negotiate either the transfer of the franchise agreement or obtain a new agreement for the new business.

Personal guarantees for unpaid fees may also be included in franchise agreements, so it is important to consider this aspect in negotiations with the franchisor or in assessing one’s position.

‘Onerous contracts’ and their effect on a franchisor

The Insolvency Act, 1986 permits a liquidator to terminate onerous contracts to facilitate the winding up of an insolvent company, as such contracts can be a financial burden. In a franchise agreement, fees are integral to operating the franchisee’s business using the franchisor’s intellectual property.

Should the agreement be disclaimed by the office-holder, the franchisor becomes an unsecured creditor for any unpaid fees or charges, putting them at the bottom of the repayment hierarchy and potentially receiving no financial return from the liquidation process.

Frequently asked questions

What happens when a franchise goes into liquidation?

When a franchise goes into liquidation, its assets are sold to repay its debts and the franchise agreement is terminated, leading to the closure of the franchise.

Can a franchise be liquidated?

Yes, a franchise can be liquidated if it is unable to repay its debts and meets certain legal criteria for liquidation. In such a case, the franchisee may lose their investment and the franchisor may terminate the franchise agreement.

Conclusion

If a company in a franchise agreement enters voluntary liquidation due to insolvency, the franchisor may choose to terminate the franchise agreement. This termination would rank the franchisor as an unsecured creditor, meaning they would be placed at the bottom of the list for repayment.

As a result, the franchisor may not receive any financial return from the liquidation process. It is important to note that franchise agreements typically include personal guarantees for unpaid fees, and franchisees should consider their own position or negotiate with the franchisor to transfer or obtain a new franchise agreement for their new business.

If you are a franchise and need insolvency advice about your business simply contact us on 01246 912052 to speak to one of the team.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.

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