Franchising helps save struggling companies: Wright

There is rarely a bright side to observing a business on the rocks – and people losing money or their livelihoods.

The Kleenmaid situation is a case in point.

But is Kleenmaid symptomatic of some sort of chronic illness in franchising? The answer is ‘no’ and, perhaps ironically, the proof comes from another company which has been in troubled waters: car care service provider, Midas.

Many franchise businesses have flourished in the midst of the economic downturn. Today’s NSW Franchising State Conference will be told of half a dozen examples of franchises which are performing better in the first half of 2009 than they were in the same period last year, when the boom was still running. A number will outline recent franchisee growth and their expansion plans domestically and offshore for the rest of 2009 and into 2010.

In another unrelated event, Midas franchisees will be told how their system has been restored to profitability.

Midas was not a victim of the global financial crisis. It suffered severe capital problems and the outcomes were painful for the company’s creditors, who can expect to get very little of what they are owed, and for some franchisees whose unprofitable businesses have had to be closed.

However, it is a considerably brighter picture for the majority of franchisees who have been able to continue on trading, due to the active business restructuring which has allowed for business continuity and a return to profitable operations.

The bottom line is that the franchised business model at Midas was a strength, not a weakness.

On a day-to-day basis, customers have still been able to have their cars serviced at their local franchisee operated Midas outlet, as the franchisee was still able to use the Midas system and brand, the marketing fund was still available and the franchisees still had most of the normal benefits of being part of a franchise network.

The Administrator, Ferrier Hodgson, played a constructive role, but the reality is the franchise agreements were a valuable asset and the Administrators needed the cooperation of the franchisees to put the rescue deal in place.

Midas is not a one-off story. It is also worth remembering another relevant case: car audio business Strathfield. When Strathfield went into administration restructuring to keep the brand afloat, it emerged with a new business model: franchising. Far from being wary of potential problems, the new owners chose franchising as a solution to their problems.

Franchising is not a panacea for all ills, but it is worth noting that even in very tough times franchising does have some structural advantages for franchisees, when compared to other business models.

The contractual right franchisees have to use the brand and system is not extinguished when the franchisor becomes insolvent, and the insolvency administrator will be keen to deal with franchisees and keep the business running.

Franchising cannot save businesses which become unviable for whatever reason. But if franchisees are running profitable businesses they will typically be able to ride out the storm, as the Midas case demonstrates.

The disclosure process contained in the Franchising Code of Conduct, which requires financial statements and a director’s statement of solvency to be attached to the disclosure document each year, also gives franchisees an early warning of potential problems. And if the disclosure document has not been updated or is deficient, the Trade Practices Act provides potential legal remedies against the directors and individuals knowingly involved in any breach.

Steve Wright is executive director of the Franchise Council of Australia.