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Franchisors Nirvana: Retain Sites And at the Same Time Assist Distressed Franchisees

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Franchisors and franchisees have an intimate relationship. In the past, there has been the analogy to a parent/child relationship.

Initially, at the commencement of the business, with the franchisee adopting the role of the child, the franchisor as the parent, the franchisee looks to the franchisor for all the assistance and support they can provide to get their business up and running and generating profits. As the child moves into their teenage years, i.e. the franchisee has some experience operating the business and an understanding of the brand, a rebellion stage may start and the teenager challenges the parent (franchisor) on marketing, operational support, new initiatives and a host of other issues.

The final stage is when the teenager becomes an independent adult and moves out of home. In this analogy, the adult (franchisee) may wage war against the parent (franchisor) from failed marketing strategies, lack of innovation, perceived misuse of financial resources amongst other issues.

The influx of new brands into the franchising sector is in my view reaching an inflection point and franchisors are under pressure. There is no better example than in the food franchising segment.

As an example, recent reports confirm that US giant, Taco Bell, is again having a crack at the Australian market despite the strong and established brand presence of Zambrero, Guzman y Gomez and Mad Mex. The question remains as to how many brands can survive. Even those brands that do have long term viability and have cemented their place in their local market, it is inevitable that franchisors will see some franchisees in their network under financial stress from the new competition.

How does the franchisor manage this situation?

In the case of financially distressed franchisees, the relationship between the franchisor and franchisee may already be fractured. Before the respective parties bring in their legal representatives, or either party seeks formal mediation with the ACCC, the commercial option is to look to a third party that can objectively assess the position of both the franchisor and franchisee to develop a workout.

As a member of the FCA (Franchise Council of Australia) de Jonge Read has hands on experience in managing franchisor issues and developing commercial strategies that are acceptable to both parties. Whilst both parties may have differing objectives, workable solutions can be created that allow both parties to move forward.

Given the franchisor is in most cases a secured creditor with a binding franchise agreement, these situations require careful planning and buy in from the franchisor to achieve the optimal outcome.

We welcome enquiries from franchisors as to how we can assist them in stabilising their network by retaining sites, or assisting financially distressed franchisees to counter potential brand damage.

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