Business Rescue in franchising
Business Rescue
in franchising
In the movie ‘Demolition Man’ Sylvester
Stallone just awakened in the 21st century from a 40 year cryogenic sleep, is
taken to a ‘fine restaurant’ for dinner. As they pull up at Taco Bell in the
electric self-drive car, Stallone asks, "Taco Bell, is this a
mistake?" To which his friend replies, "Not at all. Since the great
franchise wars, all restaurants are now Taco Bell."
By Juan
Engelbrecht
Since its
inception franchising has been known for its conflicts between franchisee and
franchisor and between brands, but to imagine a war between brands that
resulted in a one franchise state as depicted in Demolition Man...
In the
previous issue we discussed the definition of ‘distressed business’ and the
basics of the Business Rescue process as well as the rights of affected parties
under Chapter 6 of the new Companies Act 71 of 2008 promulgated into law in May
2011. Until the introduction of the Consumer Protection Act, South
African franchisees enjoyed little protection under the law and we now take a
look at how this has changed.
A short history of franchising
The origin
of franchising is credited to Albert Singer, who has long been accepted as the
originator of franchising in the United States, but while he was an early ‘commercial’
franchisor, Singet was not the first. The designation is given probably because
his is the earliest name to survive or to have been recorded as such. In the
book ‘Franchising - The How To Book’, Lloyd Tarbutton places the first chain
store concept as being established in 200BC. In South Africa the bragging
rights for establishing the first franchise is claimed by George Halamandaris
who came upon the idea for Steers while visiting the USA in 1960. The Golden
Spur in Newlands, Cape Town which opened in 1967 must be the longest surviving
franchise outlet in South Africa.
To ensure
that we don’t end up with only one franchise concept as depicted in Demolition Man,
franchisors must adequately address the key factors of management, marketing,
concept and capital. Of course, the concept has to work to begin with. The franchise
concept must be replicable, it has to provide adequate returns, it must be
distinguishable from competing concepts both at a franchise and consumer level
and perhaps most importantly, it must have ‘sizzle’. At the very least it must
be a niche product or have a substantial stake in a niche market.
For the
franchisor, franchising is a low-cost means of expansion; not a ‘no cost’ means
of growth. Ultimately, the development of any great franchise is about developing
a great brand and great brands are a result of consistency in execution. The franchisor has to build his model on
happy and achieving franchisees, yet it is this
concept, the consistency in execution, product delivery and adhering to the blueprint,
that is at the very heart of the franchisor/franchisee conflict.
The rights of franchisees
Under the Business
Rescue chapter in the new Companies Act, franchisees who find their business
survival being threatened now have new tools and steps at their disposal.
If a
franchise operation is a ‘distressed business’, meaning it is reasonably
unlikely that it will be able to pay all of its debts as they fall due and in
the immediately ensuing six months, or if it appears to be reasonably likely
that the company will become insolvent within six months, a Business Rescue may
be logged by a Board Resolution.
The Golden Rule
The ‘Golden
Rule’ is to start the business rescue process earlier rather than later. Getting
the franchisor on board strengthens the business rescue plan as it is seen to
corroborate the reasonable prospect that the business can in fact be turned
around. The appointed Business
Rescue Practitioner will ‘supervise’ the business and is also responsible for
drafting the Business Rescue Plan.
This process
affords the franchisee a temporary moratorium on the rights of claimants
against the company or the property in its possession. During this period the
Business Rescue Practitioner may suspend payments or consider writing off some
debts and he/she may even propose and negotiate new payment plans with creditors.
In accordance with the steps explained in the previous article, the Business
Rescue Practitioner is allowed 25 days to draft the plan which is then presented
to the ‘affected persons’ for voting on.
Objective of Business Rescue
The object of Business Rescue proceedings is to
save the business by securing its solvency and for all creditors to enjoy more
protection than in the event of liquidation, i.e. they should receive more
money as a result of voting in favour of the Business Rescue Plan. In the
matter of Koen vs Wedgewood Village Golf & Country Estate, the following judgement
and observation was passed:
‘Par 17: The
applicant must satisfy the court that there is a ‘reasonable prospect’ that the
company can be rescued in the relevant sense. The applicant must place before
the court a cogent evidential foundation to support the existence of a
reasonable prospect that the desired object can be achieved – either the
continued existence of the company on a solvent basis or a better return than
would result from the immediate liquidation of the company.’
If the
Business Rescue Plan is rejected by creditors it may ultimately lead to the
business going into liquidation.
The franchisor’s role
Franchisors may
apply to the Court to have a franchise outlet placed under Business Rescue if he
owed monies for products or royalties which he believes the franchisee will not
be able to meet in the near future. The franchisor may recommend a Business
Rescue Practitioner to be appointed or leave such an appointment to the Court. Such
steps may be seen as taking action to protect the brand and its trade marks.
It is
advisable to use the tools and mechanisms available under Business Rescue when
the signs of financial distress first become evident, but deferring to the
services of a Turnaround Strategist at an even earlier stage could prevent the
need for Business Rescue proceedings to be implemented altogether. The result
of delaying to take action is evident in the recent demise of 1Time Airlines. Turnaround
Strategists have the ability to make the tough management decisions required to
save the franchise and where conflict exists between the franchisor and
franchisee, he/she could recommend unbiased action to remedy the situation.
+27 71 679 9226
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