Canada: How Can A Franchisor Support A Franchisee In Financial Difficulties?
Franchising Bulletin

Periodic increases in interest rates, inflation, rising raw material costs, increases in distribution costs, labour shortages, new laws, new regulations, the end of COVID-19 subsidies, repayment of loans obtained during the pandemic, roadworks, etc. are all factors that are greatly increasing the financial pressure on many businesses, including many franchises.

For example, according to data from Restaurants Canada, 1,577 restaurants closed in Quebec and 7,576 closed in Canada in 2022, representing around 15% of all restaurants in operation.

Except for franchisors with a very large number of franchisees, the collapse of one or a few franchisees can have a major impact on the entire franchise network, particularly in terms of reputation and credibility (in its market and towards its customers, suppliers and partners). It can also constitute a major obstacle to any future development of the franchise network (particularly in the jurisdictions where franchisors are required by law to provide all prospective franchisees with a disclosure document setting out, among other things, franchise business closures and terminations of franchise agreements).

In some cases, too, the insolvency of a franchisee has direct financial consequences for the franchisor. This may be the case, for example, if the franchisee owes the franchisor significant sums of money, if the franchisor has provided a guarantee or made a commitment (such as an agreement to buy back inventory or a letter of comfort) in favour of one of the franchisee's creditors, or if the franchisor is the principal tenant of the premises in which the franchisee operates.

Faced with this reality (current for some and foreseeable for others), what should a franchisor do to support a franchisee experiencing financial difficulties?

Since every situation is different, there's obviously no single recipe.

However, here are five tips (or keys) to proactively manage the risk of financial difficulties for one or more franchisees:

First key: Complete, up-to-date information

It is a fundamental principle in management that you can only manage what you can measure.

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

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

For those franchisors who don't already have such tools, or whose tools are insufficient to provide them with a complete, up-to-date picture on an ongoing basis, it would be appropriate to put in place various means of ensuring that they rapidly obtain (on a daily or, at the very least, weekly basis) the financial information they need to fully understand and monitor the financial situation of each of their franchisees, as well as its evolution.

Second key: Open, honest and transparent communication

Frank, open, honest and transparent communication between franchisor and franchisees is also an essential tool for sound management of the risk of financial difficulties among franchisees.

Beyond the figures, it enables the franchisor to take the pulse of his franchisees as to their perception of the situation, its impact on their businesses and on them, and, for those whose financial situation is more delicate, their assessment of the possibility of their businesses returning to profitability.

To be truly effective, and to enable the franchisor to manage his network's situation (particularly in financial terms), it is important that this communication be truly two-way (from franchisees to franchisor, and from franchisor to franchisees), and that it be frank, open, honest and transparent.

Third key: Ongoing monitoring and assessment

Being well and quickly informed and communicating well are important keys, but insufficient on their own to adequately manage the risk of financial difficulties within a franchise network.

A prudent franchisor should also continuously evaluate the information he obtains, and that which he himself possesses, in order to anticipate, and thus be able to manage, the likely scenarios for each of his franchisees, as well as for his network as a whole.

In the event that a franchisor believes that a franchisee is facing, or may soon face, financial difficulties, the franchisor should make sure to assess the evolution of the situation on an ongoing basis, in order to make the best decisions and take the most appropriate measures in the circumstances, in good time.

For many franchisors, it would be a good idea to enlist the help of a financial and legal expert experienced in financial planning, turnaround, restructuring and, in the worst cases, insolvency.

Fourth key: Fast and relevant assistance

A fourth key is the assistance a franchisor can offer to its franchisees experiencing more serious financial difficulties.

A first form of assistance consists of informing franchisees, as quickly as possible, about the various financial management and financing tools and means available, and helping them to make the most of them.

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

A third form of assistance consists of designing and implementing new ways of generating sales and revenues for franchisees and the network, such as an exceptional advertising or public relations campaign, a transactional website, delivery, pick-up, sales on various platforms, sales in other businesses or on their sites, participation in various collaborative projects between franchisees and other businesses or to promote local purchasing, etc.

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

This assistance can take a variety of forms, such as financial management support, deferral of certain payments, reduced royalties, a special contribution by the franchisor to the network's joint advertising fund, loans, etc.

Fifth key: Genuine collaboration

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.