Despite everyone’s best intentions, thorough due diligence, preparation and hard work, businesses can and do fail. We, as lawyers are trained to be sceptical and to look at the dark side and that is not necessarily a bad thing for our clients.

Really, what we offer to our clients (whether before, during, or after the franchise business has ended) is “preparing for the worst” which allows the client to focus and work on the “hoping for the best” part of the  equation.

We recently gave advice to a client investing in a sushi franchise in a shopping centre. The franchisor was applying a lot of pressure on the potential franchisee to start trading even before the documents had been finalised. On balance, we could not recommend our client go ahead with the business.

The client listened to our advice and then bought the business anyway. Four weeks later we heard that queues in his new sushi kiosk were never ending and that he was making an absolute killing in sales.

The lesson is not to ignore the advice of your lawyer, but to take the advice, weigh it up, and make an informed commercial decision about the risk you are undertaking. No risk – no return.

However, if things do go wrong, lawyers can often see light at the end of the tunnel.

Here are a few tips to consider if your franchise business is beyond hope:

1. REFER BACK TO YOUR ORIGINAL STRATEGY

If you received good advice before buying the franchise, your lawyer should have explained to you the commitments you are making, to whom, for how long, and for how much. If so, you may have made special arrangements with the franchisor about the very predicament you currently find yourself. Now is the time to put into play those arrangements. In the absence of other unforeseen circumstances, you should be able to cut your losses and run.

2. WHAT EXIT STRATEGY?

If you are caught off guard and have not planned for your current state, a good franchise lawyer should be able to assist.

First, it is important to take stock of the magnitude of your position. What are your current assets and liabilities? To whom are you committed – franchisor, suppliers, landlord? Your accountant should be able to assist with the numbers.

3. NEGOTIATE YOUR WAY OUT

Dale Carnegie said that you can stop worrying and start living if you just imagine the worst case scenario, accept it as if it has already happened, and then work on improving the situation.

Ideally, you should be able to negotiate a way out of the commitments you are in – franchise agreement, licence agreement or lease, bank loans, etc.

If you are in dispute with your franchisor, negotiation or mediation can be cost and time effective ways to bring about the desired result. In rare instances, you may have to start legal proceedings.

4. TOO LITTLE TOO LATE

If none of the above work, you are losing money, cannot exit the business, and are not able to negotiate a way out, you have to consider the risks associated with insolvent trading. If your accountant cannot see a way to trade out of the position you are in, you may have to consider the options of administration or liquidation.

At this stage, a good insolvency practitioner can provide immense benefit by minimising the harm and the effects of insolvency. It is one thing to fail once in business, but quite another to be prevented from further attempts for years to come.

REMEMBER:

• Get advice early (but it’s never too late to get advice)
• Devise an exit strategy before entering
• Keep on top of your financial commitments
• Failing to plan is planning to fail!

Ilya Furman and Jane Garber are solicitors of Franchise Legal with offices in Melbourne, Sydney, Brisbane and Adelaide.