The COVID-19 pandemic has been a time of unprecedented challenges for businesses in all sectors and of all sizes throughout the world. The franchise model, with its combination of a large and well-established franchisor, partnered with smaller entrepreneurial businesses, has experienced its unique issues, along with many of the same ones faced by businesses in general.
This combination also provides franchised businesses with some peculiar advantages over "stand-alone" businesses. This article looks at some of the experiences businesses both in the franchise sector and in general have had, and some of the lessons that they can take from them that may stand them in good stead if situations arise in future that may threaten the viability of some or all the franchisees in a system.
One of the great talking points of the pandemic has been the need for businesses to adapt their models to cope with changed circumstances. Retail outlets and restaurants started taking orders remotely and delivering products to their customers; gyms and educators began offering on-line classes. Often these adjustments conflicted with the strict description of the business formula prescribed in franchise agreements. Franchisors needed to allow flexibility and make adjustments to the business model, and the agreement, to allow franchisees to stay afloat and to avoid damage to the goodwill of the brand.
Increased financial vigilance
Many financial institutions, as well as the government, made financial assistance available, especially to small and medium-sized businesses during the first few months of the lockdowns imposed due to the pandemic. Many of these programmes have come to an end, although the financial hardship that was brought about by the lockdowns in many cases continues. Some franchisees, especially those who were already on shaky ground before the pandemic, may not survive. This is more likely in industries hit hard by changes to their business model. To avoid wholesale terminations, the franchisor must be even more diligent than before in monitoring the status of franchisees, to identify problems before they become more difficult to solve. In many instances, a negotiated workout arrangement, based on restructuring of franchisee payments, may be possible, which can avoid the need for termination and provide a better long-term outcome. Typically, the longer the trouble continues for the franchisee, the more limited the options to fix it become.
Business Interruption Insurance
Initially, there was some concern that the typical business interruption insurance policies would not come to the assistance of business owners forced to close. Indeed, in two cases heard by the Western Cape High Court, insurers argued that although the pandemic resulted in a loss to the business of the insured, it did not trigger liability under the policies and that any loss that the insured had suffered over the lockdown was caused by the lockdown itself and/or a general concern or fear of the public, and not directly by the contagious disease (as required by the policy). The business owners counter-argued, and the Court concluded, that the COVID-19 pandemic and the government response to it were inseparably one and the same peril (an outbreak always comes with a risk of a government response) and that accordingly there was a factual and legal causal link sufficient to trigger the policy wording. It is advisable for franchisees to check the wording of their policies to ensure that there is no ambiguity, which an insurer may invoke to avoid indemnifying the business against losses arising out of a pandemic or similar public health threat.
The pandemic has forced business owners to confront several employment-related issues. These have included:
Health and safety - The regulations published by the Government have prescribed detailed protocols to be observed in every workplace to prevent the spread of COVID-19. A franchisee failing to observe the protocols in their place of business will be in contravention of the regulations. In addition, they will also be in contravention of employment-related laws, like the Occupational Health and Safety Act and the Basic Conditions of Employment Act, by failing to provide a safe working environment for their employees.
Renegotiation of remuneration packages/retrenchment - Franchisees faced with reduced turnover and profits may be forced to consider reducing payroll expenditure, by adjusting wages, salaries or other benefits, or by retrenching certain staff members. Notwithstanding the exceptional circumstances, and no matter how severe the franchisee's own financial distress may be, the procedures prescribed by the Labour Relations Act must be followed and the employees' rights must be respected.
Most franchise agreements contain general terms requiring franchisees to comply with all applicable laws when conducting their businesses, and franchisors should ensure that the franchisees are complying with their obligations when dealing with their employees in matters arising from the pandemic.
Especially in the retail and food service sectors, rent has always been one of the largest expenditure items of franchised businesses. It is therefore one that distressed businesses will seek to reduce as far as possible. Very few commercial leases, especially those relating to premises in large and traditionally popular malls, provide any leeway for the tenant to renegotiate either the rent or the size of the premises. At the same time, it is not in the interests of any landlord to allow large numbers of tenants' businesses to fold because they cannot afford the full rental. Landlords are also advised to take a long-term view and assist tenants with rental breaks and reductions unless circumstances have normalised. Franchisors, especially those who have a number of franchisees hiring premises from one landlord, are well-placed to assist their franchisees in this regard. Especially in the case of leases that have a short time left until expiry, franchisors and franchisees may find landlords amenable to negotiating lower to secure that the tenant remains in premises that might otherwise stand empty.
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.