What is franchising?
Franchising is a business arrangement in which a franchisor distributes goods and services under the management of a franchisee. Franchising refers to a business relationship between the franchisor and the franchisee. The franchisor is the owner of the business which provides goods and services to franchisees or independent people. Franchisors give franchisees the rights to sell their products and use their business name in exchange for a monetary consideration. They do this by entering into a franchise agreement detailing the business terms. A franchisee is obligated to comply with the terms of their franchise agreement regardless of liquidation.
What is liquidation?
Liquidation refers to the company winding up their business. They do this by selling off their free assets to pay off secured creditors. Shareholders receive any remaining amount of money proportional to their shareholdings. A company undergoes liquidation when they become insolvent and cannot pay off their debts to stakeholders. There are many things to do if your business is having financial problems. Liquidation and bankruptcy should be your last option. The company can voluntarily initiate this process or shareholders can mandate it through a court order.
What happens during franchisor liquidation?
A myth is that franchisees can terminate their franchise agreement during franchisor liquidation. This is false unless the agreement explicitly permits them to do so. A liquidator will be appointed to the company to start the wind-off process during liquidation. The liquidator will then take control of the company and the franchises. The liquidator will look for a new purchaser to acquire the rights of the company. They may even offer these rights to one of the franchisees. The franchisee can only sell or transfer their rights with the franchisor’s consent. Therefore, they must continue to comply with their agreement until a new franchisor is appointed.
A new franchisor?
The franchisee will comply with the rights and interests of a new franchisor. These rights and interests can be different from the original franchisor. However, the new franchisor must still fulfil their legal obligations to their franchisees. This would not normally impact a well established franchise system too much. You should allow for an adjustment period to settle in your new agreement and any changes. A new franchisor would have the best interest of the franchises and will aim to improve the system.
Final thoughts
Franchisor liquidation does not necessarily impact your franchise. In these cases, a new franchisor will be appointed and will maintain rights over you. You must always comply with your franchise agreement despite your franchisor’s liquidation. This new franchisor will aim to improve the franchise branch to prevent liquidation from recurring. However, you should acknowledge that the processes of the new franchisor may be different to the original one. You should ensure that you are always compliant with their requests. Contact a business lawyer for more information if you are still unsure about your franchise agreement.
