When a franchisee chooses to enter to a franchise their decision will be largely based on the reputation and success of that system. Unfortunately, even the most reputable systems can fail and franchisees can be left questioning whether they can keep their business. This situation has recently been highlighted through the current appointment of administrators to Eagle Boys, but of course Eagle Boys may work through the administration.
When a franchisor becomes bankrupt or has liquidators appointed (aka ‘goes bust’), the consequences will depend on the circumstances.
Who owns the IP
In most franchise systems the franchisor does not own the intellectual property. This is generally made up of the brand, trademarks, business names and other registered intellectual property to which value is attributed and goodwill has grown. A separate company (IP holding company) is usually set up for the sole purpose to own the intellectual property. The IP holding company will licence the use of the intellectual property to the franchisor. If the franchisor ‘goes bust’, then the IP holding company can sever the licence. This means that ownership of the IP is retained by the IP holding company and is protected, but the franchisor and franchisees effectively lose the right to use the intellectual property.
An option before signing the Franchise Agreement is to attempt to negotiate an agreement between the IP holding company and the franchisee covering the event of the franchisor failing. The IP holding company can step up and enter into an agreement, whether it be a licence or otherwise, with the franchisee enabling the franchisee to continue trading under the brand using the intellectual property in an attempt to minimise the disruption to the franchisee’s business.
What are the franchisee’s rights under the Franchise Agreement?
Franchise Agreements usually do not provide any rights for a franchisee if a franchisor becomes insolvent or fails in any other way. It is usually ...