What happens to franchisees when a franchisor fails?

Fortunately, for the reputation of franchising in the UK, this happens very infrequently.  When a franchisor decides that franchising is not the way forward, having recruited franchisees, generally such a franchisor cannot immediately withdraw from franchising. It has to serve a reasonable period of notice on franchisees and usually that period of notice will not be less than five years.  If, however, a franchisor is in financial difficulty, then what happens to franchisees will depend on just how serious the franchisor’s financial issues may be.

If a business is insolvent there are various options.  Liquidation arises when the franchisor is insolvent and the insolvency practitioner does not believe that it can be sold as a going concern. In this scenario the assets of the franchisor’s business are sold off. Generally speaking, the assets that a franchisor has are the brand and the franchise agreements although, of course, on a liquidation, often  franchisees will be able to argue that their franchise agreement has come to an end and they are released from any obligations whether during the term of the franchise agreement or following termination. In other words franchisees would be able to carry on their business but what they would not be able to do is to carry on using the franchisor’s brand because that is an asset that the liquidator may want to sell. Having said that liquidators may not wish to devote time and resources in pursuing franchisees.

If a receiver is appointed then a purchaser for the franchisor’s business will be sought because the value of the business as a going concern is likely to be substantially higher than simply the value of its assets.  As a result, the receiver will continue to operate the business and it may well be that franchisees would not be able to argue that they are entitled to terminate their franchise agreement, because in this scenario the franchisor would continue to comply with the obligations in the franchise agreement.