When the Franchisor Fails, Jenny Buchan

Franchisees are more like employees who have invested money in the franchisor than independent business operators. Despite the franchise agreement stating very clearly that the franchisee is not an employee of the franchisor, it appears that some franchisees regard themselves as employees.

University of New South Wales
January 2006

When the Franchisor Fails
A research report prepared for CPA Australia
Jenny Buchan

Executive Summary

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For free download.
• At least 40 franchisors failed in Australia between 1990 and 2005. (Appendix 1)

• Approximately 1090 franchisees and their families were directly affected. (Appendix 2)

• If each franchisee of a failed franchisor had the industry average number of employees, the 40 failures would have affected more than 11,500 employees.

• These failures have indirectly affected landlords, financiers and other suppliers.

• Failed franchisors have been in business for up to 94 years and they have been in franchising for up to 14 years at the time of failure.

• Failed franchisors, and to a greater extent, their franchisees, were extremely difficult to identify. It is not obvious from the public records whether insolvent companies or bankrupts were franchisors or franchisees.

• Franchisees experienced a range of outcomes including taking the opportunity to go it alone, becoming part of another franchise system, financial loss, unemployment, and the associated consequences such as marriage breakdown and relocation.

• As a result of their franchisors’ failure, franchisees also had the following experiences:
– They experienced difficulty in trading when the media were drawing attention to the franchisor’s inability to pay its debts even before it became insolvent. Trading was particularly difficult when the franchisee was selling expensive items such as holidays.
Franchisees have no automatic statutory right to a voice at a franchisor’s creditor’s meeting because often they are not creditors.
– Liquidators owe a duty to creditors to obtain a fair market price for assets and to limit the ongoing liability of the failed entity. That is, they are not specifically concerned about the outcome for franchisees, so long as terms and prices are acceptable. They are unlikely be concerned about whether the buyer of the franchisor’s business will be able to run the franchise system.

• Fluctuations in the franchisee’s income after the failure of the franchisor could trigger a tax audit of the franchisee in the following year.

Speedy and concerted action by franchisees is essential if the franchisor is failing but often they have difficulty in contacting each other except via the franchisor. Sometimes they don’t even know each other’s surnames. Employees can turn to their unions for support, but franchisees have no support or advice network.

• Franchisees have no way of knowing in advance that the franchisor is about to fail and therefore they have no opportunity to make contingency plans.

Franchisees are more like employees who have invested money in the franchisor than independent business operators. Despite the franchise agreement stating very clearly that the franchisee is not an employee of the franchisor, it appears that some franchisees regard themselves as employees.

• Most franchise agreements stipulate that franchisee insolvency is an opportunity for the franchisor to terminate the franchise agreement. However, insolvency is sometimes defined so broadly in the franchise agreement that the law would not regard it as insolvency. In fact, it is rare for franchise agreements to contain clauses that allow a franchisee to terminate it if the franchisor becomes insolvent.

• International master franchise agreements often include contingency planning for Australian national master franchisor failure.

The research undertaken for this report shows that there is very little centrally-collected data about the legal aspects of this significant part of the Australian economy.

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Dr. Jenny Buchan, University of New South Wales, Business School

http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/small-business-survey-franchisor.pdf


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