You buy a franchise and then not long into your first term, the franchisor goes bust. Or decides to sell the business on. What happens now?

Well, communication by the franchisor is just as important as you accepting the change in ownership.

CHANGES TO THE BUSINESS

The new franchisor or equity owners may be more focused on gaining a return on investment and can introduce ideas and new systems that can be seen as a positive or negative change by franchisees.

A new franchisor may be more diligent in enforcing existing franchisee’s obligations to the business in an effort to improve the system as a whole. But other times this could lead to dispute and franchisees can choose to stay or use the situation as a means to get out.

It is also an opportunity for the franchisor to identify franchisees that aren’t performing well and to use that to negotiate their exit and invest to build on those franchisees willing to stay.

Most franchise agreements will have a provision that allows the franchise to transfer its rights to a third party without the consent of the franchisee.

There are a number of ways a franchisor can sell or transfer its rights:

• By selling its licensed rights to operate the system
• By a transfer of shares in the franchisor company or a majority of the shares to a third party
• The franchise rights may be sold to a third party that operate their own franchise system
• The franchisor goes into liquidation and the liquidator sells the franchise rights to a third party

A FRANCHISOR IN LIQUIDATION

Franchisees often believe that they have the right to end their franchise agreement when the franchisor goes into liquidation. This is not the case unless the agreement includes an express right for the franchisee to do so, which is unlikely.

The liquidator takes control of the franchisor company and can enforce the rights against franchisees. Franchisees must continue to pay royalties and follow the franchise system. The liquidator will quickly find a purchaser and in some cases offer the rights to existing franchisees or a group of franchisees or a master franchisee.

Franchisees are still contractually bound to meet their obligations under the agreement and the liquidator can enforce the franchisors rights against franchisees.

This also applies in the reverse where the new franchisor is also required to meets its obligations as a franchisor.

In cases of well established franchise systems going bust, a change in ownership may have little or no impact to its franchisees and you should keep in mind that a new franchisor is most likely looking to improve the system that will ultimately benefit everyone in the group.