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How to spot franchisee financial distress

Adrian Hunter

Franchisors invest significant time and energy when looking to attract new franchisees to their business.  However, very little thought is given to how to exit or the consequences of what could happen if things go wrong once the sale transaction has been completed. 

A business failure can result in exposure of the directors to:

  • Personal liability for company tax debts owed to the ATO
  • Personal liability to suppliers, landlords and the franchisor through the provision of personal guarantees
  • Insolvent trading (ie directors can become personally liable for the debts incurred by the company)

Whatever the trigger, early warning signs of financial distress can, if quickly noticed, result in pre-emptive action being taken.  

Warning signs of franchisee financial distress

While the failure of a business may appear sudden, there are always warning signs.  Some may be subtle and lost in the cut and thrust of running a business, such as:

  • increasing debt (liabilities greater than assets) 
  • problems selling stock or collecting debts 
  • unrecoverable loans to associated parties 
  • creditors paid outside usual terms 
  • overdue taxes and superannuation liabilities 
  • problems obtaining finance 
  • director disputes 
  • increased level of complaints 
  • ongoing losses 
  • poor cash flow 

Other warning signs are more overt:

  • solicitors’ letters, demands, summonses, judgements or warrants issued against your company 
  • suppliers placing your company on cash-on-delivery (COD) terms 
  • dishonouring direct debits or cheques 
  • special arrangements with selected creditors (including repayment program(s) with the ATO)
  • inability to raise funds from shareholders (often secured against a director’s home)
  • overdraft limit reached or defaults on loan or interest payments 

Even when franchisors are monitoring franchisee financial performance there is no guarantee of a turnaround for a poorly performing franchise.

Seeking expert advice

However, where a turnaround is needed or a collaborative approach to resolving a dispute is required, specialist external assistance is likely to be necessary.  

If a relationship needs to be terminated it is important that both franchisee and franchisor have a plan for what happens next.

Accountants and lawyers can help franchisors and franchisees through difficult times. A registered insolvency practitioner can also form part of the toolkit used to assist navigate what can be complex and challenging situations.

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