The mast of a sinking ship

The recent collapse of whitegoods and retail chain Kleenmaid has brought insolvency in franchising back into the media spotlight. The 6,000 customers who deposited $27,000,000.00 are now unsecured creditors, unlikely to receive the goods they were promised or a refund. This is the story the media has run with.

What about the 15 franchise business owners who nailed their flag to the Kleenmaid ship? They have no product supplies and no right to occupy their stores. Even if they were able to secure new product supplies and leases, in order to continue to trade they would have to substantially refit their stores and develop an entirely new business model. Past experience of franchise failures, like the Kleins jewellery chain last year, indicates it is unlikely any of the franchisees will be able to recover their businesses.

In 2008, retail and franchise chain EzyDVD was placed in administration. But unlike Kleins, EzyDVD was salvaged in the insolvency administration process and most of the franchised businesses continued to trade. Strathfield Ventures, the franchise arm of Strathfield Car Radios, has been through a similar, difficult restructure.

The commercial team at MCW have advised franchise buyers on more than 150 different franchise systems. In our experience few franchise buyers are prepared to even consider their exposure to the solvency risk of the franchisor. We think this may change over the coming year.

The recent Federal Parliamentary Enquiry chaired by Labor backbencher Bernie Ripoll picked up on this issue and recommended a “tightening” of the Franchising Code of Conduct.

Much has been said recently about whether the displacement of jobs across the board in Australia will create a pool of skilled, capable and cashed up franchise buyers. No doubt some displaced workers will look for franchise opportunities, but at MCW Lawyers  we think they will take the due diligence process more seriously. With strong competition amongst franchisors, the franchisor who embraces and addresses a more rigorous enquiry will attract better quality franchisees.