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Know when to walk away (from your franchise) Know when to run

Posted by Elizabeth Gore-Jones on 6 July 2015

Sometimes being a franchisee is a lot like being the gambler in Kenny Rogers' song by the same name.

If things are going bad, the writing is on the wall or there is just a downward spiral a franchisee may be tempted to fold 'em and run.

However, the franchisee (just like any business owner) has obligations to other parties and running or walking may not be an option (or may be a risky option).

If the franchisee has a premises lease, there are its obligations to the landlord to consider.  As a tenant, the franchisee may be liable for rent and other costs to the end of the term of the lease or until the landlord is able to find a replacement tenant.  So, if the lease has another 3 years to run, the franchisee is potentially liable for those costs for another 3 years.

If the franchised business has been performing poorly for some time, then it may have unpaid suppliers and other creditors it needs to pay and often times these debts can have increased to large amounts if the suppliers have allowed the debts to accumulate.

The bank may be owed money for loans to set up or operate the business, such as an overdraft facility, and those debts may be secured over the family home. 

And, of course there is the franchisor which may be owed outstanding monies and again, if the franchisee attempts to walk away, may be able to recover monies the franchisee would have paid to the end of the term of the franchise agreement such as royalties.

More often than  not it is a bad move to run away and pretend it never happened and it will all go away.  This is a very risky strategy at the best.

What is the solution?

Every case is going to depend upon its specific set of facts.  The personalities and circumstances of the creditors, landlord, franchisor and so on will have some impact.

The aim has to be to "walk not run" away with as little financial fallout as possible.

Generally, this is going to come down to negotiation and strategy. 

Are there certain things you can offer which will be palatable to the creditor and convince them to accept your offer in full and final satisfaction of any claim they have against you?

For instance, let's say you do have a 3 year term left on your lease.  Can you offer say 3 month's rent in advance to the landlord to release you from the lease?  That may be attractive to the landlord if they think they can re-tenant the premises quickly as that may turn out to be a win for them.  Is it possible to negotiate that rather than gutting the premises and returning it to a bare shell (as many leases require) you can leave the fitout in place and transfer ownership to the landlord?  that may make it easier for the landlord to re-lease.

Can you enter into payment plans with your suppliers?  return unused goods?  otherwise convince them it will be a waste of their time and money to bring proceedings against you to recover their loss?

Is it possible to transfer the franchise and equipment back to the franchisor and obtain a release?  Maybe the lease should be transferred to the franchisor with the business and they take over at no cost.

There are many scenarios which can be played with, suggested and negotiated.

If you are in this situation you need to identify your risks and strategise your outcomes. 

Disclaimer:  This information is of a general nature only and is not to be relied upon as legal advice.  If you are in this situation you should seek legal and financial advice specific to your circumstances.

 

Author: Elizabeth Gore-Jones
About: Elizabeth specialises in franchising law. She lectures at Bond University PLA in franchising, she sits on the Queensland Law Society Franchising Committee, she is a past member of the Women in Franchising committee and a past member of the Franchise Council of Australia.
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