When the Franchisor Fails, Has the Franchise Failed?

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When the Franchisor Fails, Has the Franchise Failed? Franchise Assist

We tend to talk about franchise failure as though the franchisor and the franchise network are one and the same. But are they?

I have worked in franchising for nearly 30 years, and one thing that experience has taught me is that the health of a franchisor and the health of its franchisees can be two different things.

A franchisor may run into serious financial difficulty while the independently owned businesses trading under its brand remain viable. Customers may still be buying. Staff may still be employed. Suppliers may still be trading with the stores. And the franchisees still have their own capital invested in those businesses.

A few South African and international examples illustrate the point.

PNA

The original PNA franchisor company was liquidated, and in January 2000 the franchise business was bought from the liquidated estate. The buyer stepped into the franchisor’s position, and the network continued under new ownership.

The important point is not simply that a corporate entity failed. It is that the franchise business, and the stores operating under it, were capable of continuing beyond that entity.

Melissa’s

In May 2018, the food and deli brand Melissa’s went into liquidation. Most of its stores were not owned by the company itself: reports at the time recorded that only three of its 19 stores were company-owned, with the rest operated by franchisees.

Published reporting also recorded that some independently owned franchisees intended to keep their stores open and trade under a new name.

That distinction matters. Those franchisees were not necessarily preserving the Melissa’s brand. They were preserving businesses they believed remained viable. Not every franchisee will have continued, but the underlying businesses were not automatically finished simply because the franchisor was.

West Pack Lifestyle

West Pack is an example I know particularly well. I have worked with the West Pack franchise network over many years and continue to advise the franchise business today.

In May 2024, West Pack Lifestyle, West Pack Lifestyle Franchise and West Pack Lifestyle Distribution Centre were placed in business rescue. The franchise company was part of that process, not outside it.

The independently owned franchise stores, however, continued trading during business rescue, and published reporting noted that they largely held on to their customers and sales through the process. The franchise business subsequently secured new ownership, and the franchise stores have continued to operate.

Business rescue creates real uncertainty for everyone connected to a brand. But the franchise stores were not simply extensions of the companies in rescue. They were individually owned businesses with their own customers, staff and trading performance, and their continued trading was an important part of the story.

Fantastic Sams

The same pattern can be seen internationally. In 2002, the master franchisor of the Fantastic Sams hair salon chain in the United States, together with its parent company and related subsidiaries, filed for Chapter 11 bankruptcy protection.

The Fantastic Sams assets were then offered for sale through the bankruptcy process. Groups with franchise interests in the system competed for them, and in 2003 the business was acquired by a group that held the regional franchise rights for New England.

The original franchisor had failed, but the franchise system continued, now owned by people who already knew it from the inside.

So, What Actually Failed?

When we say a franchise has failed, we could mean several different things:

  • the franchisor company;
  • the brand;
  • the franchise system, meaning the model, know-how and support behind the brand;
  • individual franchisee businesses;
  • or the wider franchise network.

These are connected, but they are not identical. In each of the examples above, it was the franchisor company that failed or entered a formal insolvency or rescue process. What happened to the brand, the system and the individual businesses differed from case to case.

None of this means that franchisor failure is harmless. It can create significant risk and disruption for franchisees: interrupted support, uncertainty about the brand and their agreements, and real financial pressure. Some franchisees do not come through it.

But the failure or financial distress of a franchisor does not automatically establish that every franchisee business is economically unviable. That is a separate question, and it deserves a separate answer.

Franchisor Health and Franchise Network Health Are Not the Same Thing

Franchisees are close to the day-to-day economics of their businesses. They know whether customers come back, whether margins work, whether rent and operating costs are sustainable and whether the business produces an acceptable return. They also have their own capital at risk, which tends to sharpen judgement.

So when franchisees choose to keep trading after a franchisor fails, that is an important signal. It is not conclusive proof that the network is healthy. Franchisees may continue for many reasons, including lease commitments, borrowings or a lack of alternatives. But it is a signal that deserves to be examined alongside the franchisor’s financial position, rather than overlooked.

The question also works the other way round. A franchisor can appear financially healthy while individual franchisees are struggling. Head Office may be collecting fees and opening new outlets while existing franchisees contend with thin margins, high occupancy costs or inadequate support. How the fee structure is set up affects both sides of that equation, which I discuss further in franchise fees and return on investment in South Africa.

Assessing a franchise network only through Head Office performance can therefore give an incomplete picture.

Before You Grow the Network, Measure the Network

This is where the question becomes practical for franchisors. Before asking how many more franchises a brand can sell, perhaps the better question is how healthy the businesses already operating under the brand are.

That means looking honestly at:

  • franchisee profitability and returns;
  • underperforming outlets, and why they are underperforming;
  • whether Head Office has the capacity to support the existing network properly;
  • franchisee satisfaction and the quality of the relationship;
  • compliance and operational standards;
  • how well communication works in both directions;
  • the role and performance of multi-unit franchisees;
  • whether the network is sustainable and genuinely ready for further growth.

Much of this depends on whether head office can actually see what is happening across the network, which I explore in Your Franchise Has Systems in Place. But Do You Actually Have a System?

This is the focus of my franchise network support work, and the thinking behind the Franchise Network Growth Workbook: Fix the Network Before You Multiply It. Growth built on a healthy network has something solid to build on. Growth built on a struggling one risks multiplying the problems.

So, Has the Franchise Failed?

When the franchisor fails, has the franchise failed? Not necessarily, and not automatically.

The failure of a franchisor can be extremely serious, but it does not automatically mean that every franchisee, or the underlying franchise network, has failed. Likewise, a financially healthy franchisor does not automatically mean that every franchisee in the network is healthy.

A sustainable franchise ultimately needs both: a viable franchisor and viable franchisees.

And sometimes one of the strongest signals about what remains valuable in a franchise system comes from the people with the most at stake: the franchisees themselves.

Sources

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