- Signs that your franchise business may be in trouble include:
- Struggling to meet your franchise fee/royalty or other cash flow difficulties
- Other financial or operational problems
- Lack of available security to offer for new credit
- Late filing of accounts and franchise returns
- A threat by the franchisor to activate its “step in rights”
- A sudden realization that the franchise is now a liability and not an asset
- The franchisor wanting to terminate the franchise agreement in order to re-sell the territory
When you approach us we will review and consider your business and financial circumstances and, if necessary, engage in dialogue with the franchisor to try and preserve as much value in the business as possible.
There are three common formal insolvency procedures used in franchising businesses:
Upon appointment the administrator’s first objective is to try to rescue the company itself, but this is rarely achievable. The usual, fallback, solution is a going concern sale of the business to a third party, with a live and binding franchise agreement. The business sale should achieve a better result for creditors than the alternative of liquidation (break-up) and it is the Administrator’s second objective.
Creditors’ Voluntary Liquidation
This will almost certainly render the franchise agreement null and void. Assets will be sold on a break-up basis. Assets belonging to or subject to finance from the franchisor would be returned including the manuals and intellectual property.
Company Voluntary Arrangement
This is a contractual deal between a company and its creditors, backed by statute, which creates a breathing space for a company to reorganize and restructure its finances. It may also compromise the debts owed by a company to its creditors. It requires the consent of a 75% majority of creditors and for this reason will need the franchisor to be supportive.
If your franchise period is simply coming to an end and/or you wish to retire or cash up, a Members’ Voluntary Liquidation may be an appropriate solution to the problem of extracting value from your business. In this procedure all creditors are paid up if full and the residue profits, which belong to the shareholders, are returned as a capital distribution. This can be beneficial for tax purposes due to the incidence of capital gains tax reliefs such as Entrepreneur’s relief. Obtaining expert advice from a specialist tax advisor is always advisable before embarking on this process.
To discuss your circumstances and the options you have in detail, please call John Paylor on 020 3096 0750.