Franchising can be a powerful way to grow a business and build a brand – but what happens when things don’t go to plan financially? Whether you’re a franchisor or franchisee, understanding the legal and commercial implications of insolvency is critical to protecting your interests and ensuring long-term sustainability. Key Takeaways Franchisors may have rights ... Read more

Franchising can be a powerful way to grow a business and build a brand – but what happens when things don’t go to plan financially? Whether you’re a franchisor or franchisee, understanding the legal and commercial implications of insolvency is critical to protecting your interests and ensuring long-term sustainability.

Key Takeaways

• Franchisors may have rights to terminate agreements or purchase business assets if a franchisee becomes insolvent
• Franchise agreements should include specific clauses addressing insolvency
• A franchisor’s insolvency can disrupt systems and reduce franchisee confidence
• Working with administrators and legal advisors early can help protect value and continuity
• Ongoing financial risk assessments across the network are essential

What is Franchising?

At its core, franchising is a business arrangement where a franchisor licenses the use of their brand, systems, and intellectual property to a franchisee, who operates an independent business under that banner.

It’s a model built on shared success – but also shared risk. And like any business venture, franchises can face financial hardship. Insolvency – whether it affects the franchisor or the franchisee – can have wide-reaching consequences across the network.

When a Franchisee Becomes Insolvent

If a franchisee becomes insolvent, the franchisor’s top priority is often to protect the brand and maintain operational continuity.

Here’s what franchisors need to consider:

• Termination Rights
  Franchise agreements typically contain clauses that allow termination in the event of franchisee insolvency. However, these rights must be exercised in line with Australian insolvency laws, which can impose limitations during formal insolvency proceedings.
• Right to Purchase Business Assets
  To protect the brand and potentially reassign the location to a new operator, franchisors may have the opportunity or contractual rights to purchase assets of the insolvent franchisee’s business.
• Preserving Brand Integrity
  Reputation matters. Taking swift but considered action ensures the brand doesn’t suffer reputational damage due to a struggling or non-operational franchisee outlet.

When the Franchisor Faces Insolvency

Franchisor insolvency is a more complex scenario. The ripple effect can impact dozens – sometimes hundreds – of franchisees and their employees.

Some of the main issues to be assessed by insolvency practitioners include:

• Keeping Systems Running
  Without access to the franchisor’s core systems, such as software platforms, supply chains, or operational guidance, franchisees may struggle to continue business as usual.
• Maintaining Franchisee Confidence
  Insolvency can breed uncertainty. Communicating clearly and honestly with franchisees – and providing a roadmap – helps maintain trust during uncertain times.
• Preserving Network Value
  If there’s a chance of selling the franchise system to another entity, preserving its value becomes critical. This may involve maintaining key supplier relationships, protecting IP, and continuing support services.

Practical Steps to Manage Franchise Insolvency

Franchise networks can survive financial distress – but only with early intervention and a strategic approach.

Here are four practical tips:

1. Assess Risk
   Regular financial health checks on both franchisees and the franchisor can help flag early warning signs before they become major issues.
2. Collaborate with Insolvency Experts
   If insolvency is on the horizon, engaging experienced administrators and legal advisers early helps formulate a path forward that considers all stakeholders.
3. Review Your Franchise Agreement
   Ensure your agreements contain clear clauses around insolvency events, termination rights, asset transfer, and step-in rights. These provisions are critical when things go wrong.
4. Support Struggling Franchisees
   Offer business coaching, financial support tools, or strategy sessions to help franchisees get back on track before more drastic steps are needed.

Final Thoughts

No one wants to think about insolvency, but being unprepared can make a bad situation worse. For franchisors, this means having robust legal documents, a clear strategy, and a willingness to act early. For franchisees, it means understanding your rights and the support available.

At MST Lawyers, we have deep experience advising both franchisors and franchisees through insolvency events, restructuring, and recovery planning. If your franchise network is experiencing financial pressure – or if you simply want to ensure your documents and processes are resilient – reach out for tailored legal guidance.

Need advice on insolvency or franchise agreements?

Contact Phil Colman, Special Counsel at MST Lawyers, for expert support navigating franchising challenges.
[email protected]

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