Background
Our client was a franchisee and had set up a new franchised business. However, after 18 months of operation, the business was losing a lot of money each month. The franchisor had helped to hire and train most of the franchisee's staff, had approved of the business location, had provided training to the franchisee and so on.
The franchisee followed the franchise system to a tee and undertook all extra training required or suggested by the franchisor and implemented all suggestions of the franchisor. The franchise business continued to lose money.
The franchisee had to take on another job to cover the money being lost by the franchise business. The franchisee was eventually able to convince the franchisor to buy back the business. The franchisee would make a loss under the deal, however, at least he would stop bleeding money and would be able to rebuild his life.
The parties negotiated a heads of agreement. The franchisor took some of the franchisee's staff and trained them so they would be ready for when the franchisor took over the business. The landlord was notified and asked to prepare the assignment of lease documents. The franchisee was told the transfer would happen quickly and then the franchisor went quiet. The franchisee could not get a response for 7 months.
During the period of negotiation and the subsequent 7 months, the franchisee did not advertise his business for sale or do anything to otherwise sell his business because he believed the franchisor was buying the business. He continued to lose a lot of money during this time.
The franchisor had quite simply changed its mind and failed to let the franchisee know it would no longer be purchasing the business. The contract to purchase had never been signed and the heads of agreement was stated not to be binding.
The franchisee owed about $300,000 in unpaid franchise fees and marketing levies. The franchisor served a breach notice on the franchisee threatening to terminate the franchise agreement if the fees were not paid in 30 days.
What We Did
We prepared a 12-page notice of dispute / letter of demand. This led to an informal meeting between us and the franchisor. That meeting did not eventuate to an outcome but was one step closer to a resolution.
The parties negotiated between themselves and the only solution the franchisor really came up with was for the franchisee to either sell the business at a greatly reduced value or to employ a new manager who may turn the fortunes of the business around.
The franchisee had been operating the business for longer than 2 years now and neither of those outcomes were agreeable to him.
We referred the matter to the Office of Franchising Mediation Advisor for the appointment of a mediator.
Outcome
The mediation resulted in an agreement between the parties:
- the franchise fees and marketing levy would be significantly reduced to allow the franchisee to continue to operate;
- the franchise fees and marketing levies the franchisee had not paid in the amount of about $300,000 would be halved and the franchisee could pay them off over a period of 6 months;
- the franchisor would give the franchisee the training and support it needed to turn the business around; and
- if the franchisee could sell the business, then the transfer fee payable on sale would be significantly reduced.
This placed the franchisee in a significantly better position to either sell the business or to stick at it and attempt to turn it around with the breathing space of significantly reduced debt and fees to be paid.
Learnings
Whilst the franchisor did not agree to buy back the business, we certainly achieved some breathing room for the franchisee.
If the franchisee is able to turn the business around, he has stated he will stick with the franchise system. The franchisor's willingness to listen and collaborate at the mediation mended a very fractured relationship and both of the parties expressed their willingness to work with each other if the business performed.
The reduction in fees and waiver of large part of the debt took a lot of pressure off the franchisee. That will allow the franchisee the time to sell the business for a reasonable amount rather than having to fire-sell the business.
The franchisee was released from paying in excess of $200,000 in fees as a result of this process.
