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How franchisor insolvency can affect franchisees

If the franchisor fails, there is a real risk that franchisees will fail too.

Franchisor insolvency can affect franchisees in different ways. For example, the franchisee:

  • may lose their right to use the brand
  • may be unable to get stock if they receive it through their franchisor or a company associated with the franchisor
  • may lose their right to occupy the premises if the franchisor holds the head lease where the franchisee operates their business
  • may have to continue to make payments to suppliers, landlords, employees and banks even if they can no longer operate their franchise.

Franchisor’s financial and solvency information

The disclosure document must include a franchisor statement about its solvency.

The best time for a franchisee to protect themselves from a franchisor’s insolvency is before they enter into a franchise agreement. If you are thinking about buying a franchise, you should:

  1. Do due diligence on the financial health of everything about the franchise. Even if the franchise brand seems to be doing well, you need to do your own research. Find out more about due diligence by doing our free online course.
  2. Get legal advice to see if you can protect yourself from the impacts of a franchisor’s insolvency, before you sign the franchise agreement.

Franchisees should keep track of the financial position of the franchisor because it can change. Franchisees can check the franchisor’s current financial details by requesting an updated copy of the disclosure document from the franchisor once every 12 months.

Franchisees should speak to their accountant or business adviser if they have any concerns about the solvency of the franchisor.

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