If you are operating a business as a franchisee you need to exercise due diligence and observe closely the comments made by the franchisor and read and analyse the written reports, including financial reports, prepared by the franchisor.
If you are unable to understand and interpret financial reports, please seek our professional accounting advice.
The type of information the franchisee should be monitoring includes the franchisor's disclosure document, which the franchisor is obliged to update, on an annual basis, under the Franchise Association Code of Practice.
Look out for signs of financial difficulty from the franchisor. This could include late despatch of stock, trouble obtaining stock, or long delays in payments of amounts owed to the franchisee. If you are suspicious that the franchisor is having difficulties, seek legal advice at the earliest opportunity as to whether there has been a breach of the franchise agreement. This might give you a legal basis to take some action against the franchisor. Possible actions could include renegotiating the franchise agreement and renegotiating the lease so that the franchisee deals directly with the landlord.
In some franchises, individual franchisees have formed groups to monitor the performance of the franchisor. If the franchisor does get into financial difficulty and an administrator or liquidator is appointed, franchisees should obtain immediate legal advice. In most cases, you will be obliged to continue to operate the business and make the payments required under the franchise agreement to the administrator or liquidator.
If you have any meetings with the franchisor or representative of the franchisor, make sure you keep detailed file notes of all matters discussed and that you keep all correspondence to and from the franchisor or the franchisor representatives.