Is it the end of the world? No, however it is unsettling to franchisees and can affect the brand.
It is often the case that franchisees are attracted to a franchise brand or system by the enthusiasm and vision of the founder. The founder may be quite hands on, meet and approve franchisees and take a direct role and interest in supporting the franchisees in the early years.
The founder may then take a step back or sell their rights in the franchise system. This can mean significant change to the brand, system and culture.
The new franchisor or equity owners will be focused on ensuring a return on their investment. They may introduce new ideas,that may be considered positive or negative by the franchisees.
Change can be liberating for some but for most, change is the unknown and it can be frightening.
The way in which the changes are implemented and communicated by the new franchisor and its management team will largely determine how franchisees react to the change of ownership or sale of the franchise rights..
Communication by the franchisor is just as important as acceptance by the franchisees.
A new franchisor may be more diligent in enforcing franchisee’s obligations and require more accountability from franchisees in an effort to improve the system as a whole. This can lead to dispute and disillusioned franchisees some will stay and for some it is the catalyst to get out
It is also the opportunity for the franchisor to identify non-performing franchisees and negotiate their exit and build on those franchisees that can adapt and wish to stay on.
Most franchise agreements will have a provision that enables the franchisor to transfer its rights under the agreement to a third party without the consent of the franchisee.
A franchisor can sell or assign its rights in a number of ways:
- By selling its licensed rights to operate the system (the Brand, intellectual property and assets)
- 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 they have a right to terminate their franchise agreement where a franchisor goes into liquidation – that is not the case.
The franchisee has no right to terminate the Franchise Agreement 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. The franchisee must continue to pay royalties and adhere to the franchise system. The liquidator will quickly try to find a purchaser to acquire the rights and in some circumstances, they may offer the rights to existing franchisees or a group of franchisees or a master franchisee.
Franchisees continues to be contractually bound to meet their obligations under the agreement and the liquidator can enforce the franchisors rights against the franchisee.
The franchisee can only transfer its rights or sell the franchise business with the consent of the franchisor.
Therefore where a franchisor sells or assigns its interest or goes “belly up” the franchisee will be required to continue operating under its franchise agreement.
Although a franchisee will continue to be bound by the terms of the franchise agreement, it should be borne in mind that the new franchisor will also be required to meet its obligations as a franchisor.
In the case of a well established franchise system, a change in ownership may have little or no impact on franchisees.
Although there will be a period of adjustment, franchisees should keep in mind that a new franchisor will hopefully be looking to improve the system and this will ultimately benefit everyone in the group.
Robert Toth| Partner | Corporate & Commercial
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