Although franchised businesses have a far stronger track record
of riding through the tough times, the reality is that perhaps for
the first time in many years franchisors will need to consider the
solvency of some of their franchisees. The health of the whole
franchise network requires franchisors to put strategies in place
to detect signs of financial stress at the earliest possible stage,
and to act quickly to minimise losses should a franchisee be unable
to pay its debts as and when they fall due. If they do not do so,
the impact can spread beyond the franchisee to supplier relations,
consumer perceptions of the network and the financial position of
If a franchisee cannot pay its debts "as and when they fall
due", the franchisee will be deemed to be insolvent under law.
This has various consequences, including that any moneys paid to a
supplier or the franchisor after this time may be characterised as
"preference payments", clawed back by a liquidator and
distributed evenly among all of the franchisee's unsecured
An early intervention strategy requires franchisors to monitor
stock levels, watch late royalty payments and stay in close contact
with third parties such as landlords and suppliers, who are often
the first to receive late or short payments from franchisees. It
would be prudent for franchisors to review the terms of their
franchise agreements to ensure that they offer the franchisor the
maximum protection. The following questions provide a good
"checklist" of the types of things that a franchise
agreement should cover:
Do the inspection and audit provisions provide sufficient power
to investigate the situation and obtain an accurate picture of the
franchisee's financial position?
Can the franchisor require evidence of a franchisee's
solvency on demand?
Does the franchisor have the power to take a charge over a
franchisee's business and personal assets to secure moneys owed
In the case of a corporate franchisee, are there personal
guarantees in place to cover debts owed by the franchisee not only
to the franchisor, but to its related entities?
Does the franchise agreement clearly set out a process for the
franchisor to purchase the franchisee's business assets at fair
market value at the end of the franchise?
Can the franchisor offset moneys owed by it to the franchisee
(for example, the purchase price for the business assets) against
moneys owed by the franchisee to it?
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).