What happens if I cannot pay my franchise royalties?
When buying a franchise, all potential franchisees have the vision of running a successful business and complying with the franchise agreement. However, the reality of business and the tough economic conditions may result in inability to pay the bills when they fall due including the royalties due to the franchisor.
So if you find yourself in a predicament of not being able to pay the franchise royalties, the best thing to do is to speak with the franchisor without delay.
Discussing your financial troubles with the franchisor may seem daunting. However, it is much more productive if all parties in the franchise relationship are on the same page. The open conversation with the franchisor may also make the situation much less stressful for you.
Your financial struggle may only be of a temporary nature, for example you may fall ill or something unexpected may happen in your personal life. Even if your issues are ongoing and are of more permanent nature, the franchisor may be better equipped to make suggestions as to how you can trade out of the financial struggles.
The franchisor may offer you a royalty free period and even negotiate a rent relief with the landlord.
You may also wish to ask for the franchisor’s consent to try and sell your business and cut your losses. Many franchisors will agree and assist with such sale. In some cases, the franchisor may even buy your business back. However, in many cases this may not be a viable option or your business may not attract an acceptable offer from any purchasers.
When deciding whether to have a discussion with the franchisor regarding your financial trouble, you must remember that the franchisor has the right to issue you with a notice of breach in relation to the royalty non-payment.
This right is afforded to the franchisor pursuant to the franchise agreement and the Franchising Code of Conduct. If a notice of breach is issued, it must describe the breach, in this case the non-payment of royalties, and give you reasonable notice to cure the breach by making the payment within a reasonable time, which does not need to exceed 30 days.
If you pay the amount listed in the notice of breach, there is no further issue. If you cannot make such payment, the franchisor has an option to terminate your franchise agreement and you will no longer be able to operate your business.
In this case, you may not just lose your business, but depending on the provisions of your franchise agreement, you may also be prevented from opening and operating a similar or competing business within a certain radius and for a period of time post termination.
Please note that if you become bankrupt (for individuals) or insolvent (for companies), where a trustee in bankruptcy or an administrator/receiver/liquidator is appointed, the franchisor will have the right to terminate the franchise agreement immediately and without providing you with any prior notice.
If you find yourself in financial trouble, you should also consult with a lawyer and an accountant concurrently with holding discussions with the franchisor. An accountant may be able to consolidate your finances and enable you to reallocate funds to pay the outstanding royalties. A lawyer will be able to assist in any negotiations with the franchisor.
The main thing to remember is not to ignore the problem but to deal with it as soon as possible.