Silver lining

To answer these questions, one has to examine what it is that the franchisor owns vis à vis the franchisee’s business. The franchisor will claim ownership to the intellectual property in the franchise. This will include the trade marks; logos; trade name; brand names; copyright in all literature (including the operations manual, advertising marketing promotional and point of sale material); trade secrets; the method of conducting the business; any know-how transferred by the franchisor to the franchisee and generally the goodwill associated with it.

All these will continue to exist irrespective of what happens to the franchisor. These together with the franchise agreements will form a part of the assets of the franchisor’s business. The franchise agreement will not automatically come to an end unless there is an express provision in the franchise agreement for this. 

Assuming that the franchisor is a limited liability company, and if going into administration is not an option, it will go into receivership or liquidation. In either case the liquidator or the receiver will take control of these assets but subject to the rights granted by the franchisor to the franchisee. One of the primary obligations of a liquidator or a receiver is to protect the assets. In most cases, of course, the franchise agreements will be producing an income, previously for the franchisor and now for the liquidator.

Usually, therefore, it is in the best interests of a liquidator, and for all, therefore, to ensure that the franchisees continue to function; that they are operating their businesses successfully and paying the franchise fees. Another obligation of a liquidator is to realise the best possible price for the assets in question. This means that he or she will be very keen to keep the franchise network alive because so long as it is alive it will have a value to the liquidator.

In most cases the obligations of the franchisor are such that a liquidator will be able to perform them. However, a liquidator does have the right to disclaim a franchise agreement on the basis that it creates onerous obligations. It would be rare indeed for a liquidator to do this because most franchise agreements do not impose unduly heavy obligations on the franchisor once the franchise is up and running.

Although franchisors have numerous onerous obligations at the front end of the transaction (ie prior to the franchisee opening for business), once a franchisee has opened for business, the franchisor’s obligations are relatively easy to perform. Unless, of course, as was mentioned earlier, the franchise system is such that the franchisee is wholly or heavily dependent upon the franchisor’s continuing support. If the franchise involves a unique or special product that is manufactured by the franchisor, it may be that the manufacturing arm of the franchisor has brought down the franchisor’s business.

If the primary object of a liquidator is to gather in the franchisor’s assets and then to dispose of them for the best price obtainable, who, you may ask, would be interested in buying them? Obviously, someone in the same or a very similar line of business as the franchisor could be interested in buying the franchisor’s business as a going concern. In my experience most purchasers of failed franchisors insist on having at least one meeting with the franchisees to canvass views and gauge opinion to determine whether or not there could be a basis for a successful long-term relationship – so a business seemingly going under may not necessarily indicate the end of the line!

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