Book franchise split reads like Shakespearean tragedy

In the literature world, nobody could write a better tale of tragic woe than William Shakespeare, yet the unfolding drama of the Angus & Robertson book chain administration may be a strange case of life imitating art.

The 25 franchisees who exited the system en masse in recent weeks (and who are now the subject of legal action by the company’s administrators) must sincerely be hoping that they have made the right decision.

In terminating their franchise agreements, these now ex-franchisees have claimed that they no longer received the benefits of the franchise, that the Angus & Robertson brand has been tarnished, and that the administrator’s requirement for customers to spend double the face value in cash when redeeming gift vouchers – and then later cancelling the vouchers altogether – caused major damage to the reputation and credibility of their businesses.

Consequently a group of 25 of the group’s 51 franchisees have decided to abandon the franchise and strike out on their own as independents.

This bold move may well have consequences that are yet to be fully determined, and risk something of a civil war between the franchisees that left, and the franchisees who stayed.

The administrators, Ferrier Hodgson, state they have legal advice that the franchisees cannot break their agreements and must continue to trade as Angus & Robertson stores and pay royalties. They have applied to have the issue resolved by the courts as a matter of urgency, but with each passing day the cost and consequences of this action continue to grow.

For a start, many of the franchisees have apparently removed their Angus & Robertson signage, as well as other distinguishing point of sale material. Some have gone so far as to rename themselves altogether. If the court decision finds against them, then the cost to simply reinstate the signage and sale materials alone will be substantial, and rub salt into the wound which led to the split in the first place.

Then there will be the reckoning of outstanding royalties, which will rub more salt into the wound if the newly independent franchisees not only have to bear the costs of paying for the re-installation of their signage, but also have to make back payments of royalties to the administrators for the privilege of doing so.

And whether the court finds in favour of the franchisees or the administrators, there is unlikely to be any serious attempt by either party to kiss and make-up as they resolve that right is on their side.

The administrators are damned either way as this drama unfolds. The vast majority of franchise agreements do not provide an escape clause for franchisees in the event of a franchisor insolvency, and so long as the administrator has been providing the bare minimum of franchise services since assuming control of the business then the franchisees may well find that they have no proper basis for terminating their agreements.

If this is the case and the franchisees are forced to return, a toxic relationship will be created that will erode the effectiveness of the administrators to operate the business as a going concern, and consequently diminish its desirability and value to a future buyer.

In turn, this may create something of a self-fulfilling prophesy for the franchisees who have left the group in that the reduction in value of the system and the reduced desirability to a buyer might actually result in no buyer being found, or a buyer who will only invest what they are prepared to lose if it can’t be turned around. Neither of these outcomes bode well.

If the system can’t be sold, the administrator will not be able to run it indefinitely and may look to wind up the business. This could mean that those franchisees who seek independence might achieve their goal at last, but be forced to endure the pain of a toxic relationship in the meantime and at what cost to their business?

If the system is sold, a buyer may or may not be prepared to heavily reinvest in the brand, and could well introduce a whole new set of organisational values that may be contrary to those for which Angus & Robertson originally stood.

Alternatively, the courts may find that the franchisees are justified in abandoning their franchise agreements, and while this might be an unexpected outcome for many observers, it could also set a dangerous precedent for any future franchise system insolvencies, plus affect the franchisees that elected to stay with the brand.

If other franchisors in future go into voluntary administration, what is to stop other similarly aggrieved franchisees from terminating their agreements and abandoning the system, thus compounding the insolvency of the system by removing its royalty income and accelerating its demise? If this happens, the banks, suppliers and others who provide goods and services to the franchise will take a hit, and may respond by withdrawing future support from other businesses in the same industry, or franchises in general.

This might mean that franchises that abandon a system may eventually become a victim of their own actions, a bit like shipwreck survivors who swim in different directions to find land, rather than staying together to improve their chances of survival and rescue.

A 2006 study entitled When the Franchisor Fails by University of New South Wales academic Jenny Buchan, found that franchisees of failed franchise systems rarely survived the collapse of their franchisor if the franchise system was unable to be sold as a going concern.

The report found that franchisees were generally unable to survive on their own because they lost access to the group buying and marketing power of a network, did not have the support services provided by the franchisor across a range of business functions such as product selection, benchmarking and performance management, business advice and operational systems, among other things.

If an insolvent system can be sold quickly to a competent operator, then the franchisees’ chances of longevity may be greatly enhanced.

However, if by their actions the rebellious franchisees have now scotched chances of a quick sale, then they may have unwittingly put themselves and the remaining 26 loyalist franchisees on a path to business catastrophe.

Time will tell if the severity of these predictions hold true, and one thing that has not emerged in media reports on this issue is if any consideration has been given to a franchisee buyout of the Angus & Robertson brand. Franchisee buyouts do occur in franchising and can often lead to a fresh start with renewed vigour for the brand while maintaining traditional values.

But for such a buyout to occur there must be one or more franchisees prepared to step up to the plate and lobby the administrators (who are not obliged to actively solicit franchisees for a buyout proposal but instead advertise in general for expressions of interest in the system).

A franchisee buyout could be a desirable outcome, but only if the buyers are respected within the group, and are able to present a cohesive and united front. Consortiums may not be suitably decisive on business issues going forward, and a co-operative of all franchise owners would risk being paralysed by slow or impossible decision-making.

It is also unknown what, if any plans the group of 25 franchisees have to eventually operate under their own new brand, and pool their resources to provide the sort of services previously delivered by the franchisor.

Whether the independence-seeking franchisees or the administrators win in the imminent court case, the unfolding drama continues to read like a Shakespearean tragedy.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.