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Bulletin | Covid-19

Beyond COVID-19: Five Keys to Better Manage Financial Difficulties within a Franchise Network

Fasken
Reading Time 8 minute read
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Franchising Bulletin

Even with the many government subsidies and assistance programs, many franchised businesses, and perhaps even a few franchisors, will not be able to financially withstand the loss of revenue caused by the COVID-19 crisis and, in many sectors, by the periods of mandatory closures, as well as by the subsequent costs that will have to be incurred to meet the standards that will be required to protect the health of their customers and employees and to maintain physical distance.

Except for franchisors with a very large number of franchisees, the failure of one or a few franchisees may have an important impact on an entire franchise network, including on its reputation and credibility (in its market and with its customers, suppliers and partners). It may also constitute a significant impediment to any future development of the franchise network (particularly in those many jurisdictions where the law mandates the franchisor to provide any prospective franchisee with a disclosure document setting out, among other things, the closures of franchised businesses and the terminations of franchise agreements).

In some cases, the failure of a franchisee also has direct financial consequences for its franchisor. This is the case, for example, if the franchisee owes significant amounts of money to the franchisor, if the franchisor has provided some form of security or commitment (for example, an inventory buy-back agreement or a comfort letter) in favour of a creditor of the franchisee, or if the franchisor is the main lessee of the premises in which the franchisee operates its franchise.

Given this reality (current for some and foreseeable for many), what should a franchisor do?

Each situation being different, there is obviously no single recipe.

However, here are a five tips (or keys) to proactively manage situations of financial difficulty within a franchise network:

First Key: Complete and up-to-date information

As a fundamental management principle says: You can only manage what you can measure.

Especially in a crisis, and even more so when that situation changes on a daily basis, complete and up-to-date information is essential in order to manage its financial consequences for the franchisor and for each of its franchisees.

With the right technological tools, many franchisors can already monitor the main aspects of their franchisees' financial situation in real time.

For franchisors who do not already possess such tools, or whose tools are insufficient to provide them with a complete and up-to-date picture on an ongoing basis, it would be appropriate to implement various means to ensure that they obtain quickly (daily or, at least, weekly) the financial information necessary to fully understand, and follow, the financial situation of each of their franchisees, as well as its evolution.

On the other hand, the franchisor should also ensure that it promptly communicates to its franchisees any information that may be useful to them in dealing with the crisis in the best possible manner, including information regarding various government assistance programs, as well as to help them benefit quickly and to the maximum extent possible from all relevant assistance (from government authorities as well as from financial institutions, lessors, suppliers and other creditors).

We invite you to regularly consult the Coronavirus (COVID-19) Knowledge Centre which contains many useful information and resources for franchisors and franchisees.

Second Key: Open, honest and transparent communication

Frank, open, honest and transparent communication between the franchisor and its franchisees is also an essential tool for sound management of the consequences of a crisis.

Beyond the numbers, it allows the franchisor to take the pulse of its franchisees as to their perception of the situation and of its impact on their businesses and on them, and their assessment of the possibility that their businesses may return to profitability at the end of the crisis.

Since the beginning of the COVID-19 crisis, several franchisors have been in daily communication with their franchisees. Given that this crisis may last for several weeks (perhaps even months), we believe that at least bi-weekly communication is appropriate.

In order to be truly effective and to allow the franchisor to properly manage the situation (especially financially) of his network, it is important that this communication be truly two-way (from the franchisees to the franchisor and from the franchisor to his franchisees) and that it be frank, open, honest and transparent.

We invite you to reread our recent Franchising Bulletin Beyond COVID-19: Faster and More Flexible New Communication Tools within Franchise Networks, which discusses communication within a franchise network in times of crisis.

Third Key: Ongoing Assessment

Being quickly informed and communicating well are important keys, but insufficient on their own to adequately manage the financial impacts of a major crisis.

A cautious franchisor should also continuously assess the information it obtains, as well as the information it possesses itself, in order to anticipate, and thus be able to manage, probable scenarios for each of its franchisees as well as for its network as a whole.

In the event that, after taking into account the various aids available, the franchisor considers it likely that the financial impact of the crisis will be significant for one or more of its franchisees, or even for its network as a whole, it should ensure that it assesses the evolution of the situation on an ongoing basis in order to take, in a timely manner, the best decisions and the most appropriate measures under the circumstances.

For many franchisors, it would be a good idea to be assisted in this assessment by a financial expert and a legal expert experienced in financial planning, financial turnaround and recovery, restructuring, reorganization and, in the most severe cases, insolvency.

Fourth Key: Quick and Relevant Assistance

A fourth key is the assistance a franchisor can offer to its franchisees, particularly those in more serious financial difficulties.

As we saw earlier, a first form of assistance is to inform franchisees, as quickly as possible, of the various assistance programs available and (for them and for their employees) and of their updates, and to help them take full advantage of these.

A second form of assistance often consists of supporting its franchisees, or even intervening on their behalf, with the franchisees' creditors (financial institutions, suppliers, lessors, etc.) in order to negotiate various accommodations to their financial commitments.

A third form consists in the design and implementation of new means of generating sales and revenues for the franchisees and the network, such as, for example, an exceptional advertising or public relations campaign, a transactional website, delivery, pick-up, sales on various platforms, sales in other businesses' establishments or on other businesses' websites, participation in various collaborative projects between businesses, initiatives to promote local purchasing, etc.

Finally, a fourth form of possible assistance consists of financial aid to franchisees, or to some of them who are going through a more difficult period.

This assistance may itself take various forms, such as, for example, deferral of certain payments, reduction in royalties, special contribution by the franchisor to the network's common advertising fund, loans, etc.

Here are some practical tips for any franchisor who wishes to offer financial assistance to its franchisees:

1. Be honest and transparent

To do so, establish clear criteria known to franchisees as to the financial assistance they can expect from you.

Also, if this assistance is not available to all franchisees, clearly communicate the criteria according to which it is granted in order to avoid the perception of undue preferences or subjective choices among your franchisees.

2. Document the nature and the terms and conditions of your financial assistance.

In an emotional time like the one you and your franchisees are going through during a crisis, it is important to avoid misunderstandings and misperceptions.

Especially during such a period, it is easy for a franchisee to believe, for example, that a royalty deferral is a royalty holiday, or that an advance is made for the long term when the franchisor only wants it for the critical period of the crisis.

In order to avoid such misunderstandings, the consequences of which may be serious, it is important to clearly describe, in writing, the nature, duration, criteria, terms and conditions of any financial assistance offered by the franchisor.

3. Prioritize the interests of the network as a whole

The franchisor, as well as its franchisees, should always prioritize the general interests of the network as a whole over any individual interests (be it that of the franchisor or that of a franchisee).

For example, if the granting of financial assistance to one, some, several or all of the franchisees risks placing the franchisor in a fragile financial situation, such assistance may, in the medium or long term, prove more harmful than useful to the survival of the network.

Unfortunately, a franchisor may be called upon to make difficult decisions with respect to certain franchisees, particularly in the case where, in the franchisor's assessment, a franchised business does not have a reasonable chance of returning to profitability (in the short, medium or long term).

In such cases, the franchisor may instead assist the franchisee in selecting and executing the best strategy to end the operation of the franchised business in an orderly and coordinated manner or to sell its assets before it becomes too late to do so.

Fifth Key: Genuine collaboration

A fifth very important key to properly prevent and manage situations of financial difficulty within a franchise network is to create, between the franchisor and its franchisees, the synergy that results from a genuine collaboration between all the members of the network.

In this regard, we refer you to our recent Franchising Bulletins entitled COVID-19: A Unique Opportunity for a Franchisor-Franchisees Strategic Partnership! and Beyond COVID-19: A Different World and Improved Collaboration Between Businesses and Within Networks which discuss the benefits of such collaboration within a franchise network and its important benefits to all members of the network.

In closing, a few words on another situation, that of the franchisor finding itself in financial difficulty.

In addition to running his own business, a franchisor also runs a network of several entrepreneurs who have placed their trust and a significant portion of their future and assets in her/him.

A franchisor therefore has a responsibility, at least a moral one, to consider the interests of its franchisees in its decision-making, even when its own financial situation becomes precarious.

With some adaptation, the five keys described above should also guide the franchisor who finds itself in difficult circumstances.

It is therefore all the more important for such a franchisor to quickly call upon experienced financial and legal experts in reorganization, financial turnaround and recovery and restructuring (and, if the situation so requires, insolvency) and to act proactively in order, at the very least, to minimize the impact of its own situation on that of its franchisees.

Fasken has all the expertise and resources necessary to advise and assist you in all aspects of managing your network, including franchisee relations, assistance to your franchisees, restructuring and financial turnaround and recovery, insolvency, anywhere in the world.

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