Governments and the communities are working together to attempt to limit the impact of COVID-19 on individuals, business and the healthcare system. These contingency measures are changing the way we interact and are having, and will continue to have, a significant impact on the economy. Small businesses are and will continue to be especially hard hit, as will be SMEs in certain sectors. Franchises are no exception to this – but they do have the advantage of being part of a network, where the franchisor’s success is largely dependent on the success of its franchisees.
So what strategic steps could franchisors consider enacting to buffer, as much as is possible, their network and their own businesses, from the worst effects of COVID-19? We have set out below some of the action our clients are taking in the face of the unprecedented economic conditions.
Assess your network and involve stakeholders early
If you don’t already have a clear picture of the financial health of all franchisees, get across this issue as soon as possible. In doing so, identify the most vulnerable franchisees, such as those with limited cash reserves, are highly leveraged or have high overheads.
- If not already doing so, ask franchisees to provide regular quick and informal financial reports/updates and, if necessary, utilise your reporting rights under franchise agreements.
- Difficult decisions may need to be made. It may be that certain franchisees were already struggling prior to the impact of COVID-19. If franchisors understand the underlying health of each franchised business, this can guide franchisor decisions should franchisees incur solvency difficulties especially where decisions need to be made quickly, or a number of franchisees encounter difficulties at the same time. This will be a time for franchisors to show strong leadership, while still remaining empathetic to the individual circumstances of each franchisee.
- You should consider developing a broad, but flexible, framework as to any concessions or assistance that you may be provided to or coordinate for franchisees. This framework should be flexible enough to allow you to refine and quickly call upon in different ways should conditions worsen.
- A franchisor may take different approaches with different franchisees, for a variety of valid reasons. However, if this occurs, you should take additional care when documenting and managing this process.
- Franchisees generally have a series of core financial obligations, including rent, franchise fees, suppliers, financiers, tax and employees. Franchisors should consider and plan how things may transpire if a franchisee (or supplier) were unable to make all these payments and what action can be taken by you to mitigate the impact on your business and your network.
- You should check franchise, supplier and other key agreements for rights of both parties (e.g. suspension, temporary operation rights etc), so that you are armed with knowledge of the legal position of all of these parties.
- Depending on the structure of the business, it may be appropriate for franchisors to engage with stakeholders (such as key financiers, landlords and suppliers) early and agree a plan as to how pressure on all parties will be shared and managed if and when economic conditions in certain sectors worsen. Relieving and managing pressure, for the benefit of the supply chain, will require a co-ordinated approach. Banks, suppliers and landlords may look to play a straight bat initially and whilst making the right sympathetic noises may not offer any concessions. However, the gravity of the situation will necessitate at some point all stakeholders having a frank discussion and making bold decisions that will affect the sustainability of some franchisees’ businesses. There is an opportunity for franchisors to lead these discussions for the benefit of its franchisees and ultimately the ongoing success and sustainability of the network.
- As part of assessing the network, make sure you are armed with evidence to show to banks, landlords and other stakeholders that the underlying franchisee businesses are otherwise sound and were operating well prior to COVID-19. In some cases, stakeholders may need to make difficult decisions as to whether the failure of a franchised business was an inevitability outside of the impact of COVID-19 which will, in turn, impact the support provided to those businesses.
- If the circumstances warrant it, and franchisors are in a position to provide it, carefully plan and document how any financial assistance, or fee concessions, may be made, so as to protect the position of the party providing that financial assistance. Where there are multiple stakeholders impacted by an event, each may need to bear some level of pain and documenting what relief each is providing will help avoid disputes down the track around interpreting these offers.
- Consider if the franchisor is able and willing to take over or manage any franchised businesses should they fail or run into significant issues – are any franchised business critical for the franchisor’s viability as well?
- You should offer guidance to franchisees on managing employees during this period – such as how they can implement paid or unpaid leave arrangements. More information about employee management can be found here.
- Franchisors should consider providing franchisees with access to information as to how they can take maximum advantage of the stimulus packages put in place by the Government to assist their businesses to weather the storm.
- Franchisors will also need to do their own financial modelling to understand the impact on their own cash flows if debtors do not pay on time and/or revenue decreases significantly. It is critical the franchisor remains on top of its financial position during this period for a range of reasons. If the situation becomes critical, directors should put themselves in the best position to take advantage of the safe harbour regime in the event of solvency concerns. It is important that shareholders have planned for any shareholder loans or equity contributions that may need to be made – what do the provisions of the relevant shareholders agreement say; how can funds be contributed to protect the shareholder’s position?
Communicate with franchisees
- Reassure franchisees that the franchisor will be working collaboratively with franchisees during this time.
- Set up dedicated information channels (e.g. intranet pages) where franchisees can access up to date information from the franchisor and reliable sources.
- Rely on your franchisee advisory council (if you have one) to ensure key messages are communicated effectively. Consider involving key franchisees in decision making that will affect the network – it is franchisees/those in company owned stores that are on the front line.
Contact your suppliers
- Contact your suppliers to understand their supply chains. Confirm where products are sourced from so that you can monitor potential impacts on supply as the situation develops. Check reporting requirements in contracts and if not already being utilised, call on this information to be provided. Understand where your network sits should supply of stock be prioritised between various customers.
- Ask suppliers to keep you updated on supply pipeline issues and work with them to understand if any changes to ordering processes can help deal with these issues.
- Start collating lists of alternative suppliers in the event of supplier collapse or product unavailability.
- Look at how your supplier contracts deal with issues such as force majeure events should a supplier be unable to supply for a continued period of time.
- Work with franchisees to develop consistent messaging to customers and give customers comfort that you are being responsible and proactive.
- Consider if moving to or pushing alternative sales channels, such as online, could help franchisees and customers. For example, we are seeing lots of businesses waive postage fees to encourage online purchases.
- If your network includes national customers, provide reassurance to them that the franchisor will be able to step in and provide assistance should individual franchisees run into trouble.
- Lots of different levers that can be pulled to deal with the fallout from the Corona virus, but central to all of these is co-operation and communication between franchisors, franchisees and other stakeholders in the business.
- Get on the front foot and make sure you are armed with information and appropriate plans in place in order to guide decision making at critical junctures.
- Take the opportunity to show strong leadership and make decisions with compassion for individual franchisees but with the ultimate goal of sustaining the viability and long term success of the network.
The circumstances are changing quickly, unpredictably and often significantly. If we can assist you in this period, including to review key contracts, negotiate and agree revisions, and to workshop and plan appropriate action in various scenarios, please get in touch. In circumstances such as these, a collaborative and commercial approach may be of great value, and we can draw upon experts in various fields to assist you and your business as we move through the changing conditions.
If you have further questions please contact a member of our Consumer Markets and Franchising Team.
Maddocks has produced guides to a range of legal issues raised by the coronavirus (COVID-19). You can access these guides here.
|Greg Hipwell | Partner
T +61 3 9258 3354
|Jessica Reid | Partner
T +61 3 9258 3539
|Shaun Temby | Partner
T +61 2 9291 6287
|Elizabeth Lilley | Senior Associate
T +61 3 9258 3619