An eight-step guide: How franchisors should respond to the COVID-19 crisis

The effects of COVID-19 are being felt by every business, big and small.

For a franchisor, it is likely that your business and the businesses of franchisees operating within your system, as a ‘non-essential service’, will be impacted by government-mandated restrictions. 

While it is impossible to determine how long business will be interrupted by the flow-on effects of COVID-19, it is important that you formulate an action plan, considering how your franchised operations may be affected by the virus in both the short and long term and what steps you can take to mitigate risk. 

Here are eight matters for you to consider.

1. Relationships with franchisees

It is important to be cognisant of the ongoing stress and difficulties that your franchisees will be facing during this uncertain time. 

As a franchisor, you have an obligation under the Franchising Code of Conduct to disclose materially relevant facts to your franchisees.

On receiving a written request from a franchisee, you must give the franchisee a copy of an up-to-date disclosure document which includes earnings information and financial details. 

As the COVID-19 situation evolves, you should ensure that you keep franchisees in your system up to date with developments and make formal disclosure where appropriate.   

2. Supply chains

Greater demand than ever is being placed on supply chains during this crisis. 

Accordingly, you should communicate with your suppliers.

Where consistency of supply cannot be guaranteed or product availability is compromised, make sure that this is communicated to your franchisees and alternative arrangements are put in place. This may involve engaging other suppliers.

You should review your supplier agreements and consider the applicability of any force majeure clause where a supplier may be unable to meet its obligations under the agreements. 

3. Financial position

Be prepared and ready for a temporary closure of your business. This will undoubtedly affect your financial position and you should be aware of your solvency at all times.

Be aware of termination rights, any material adverse change and other key provisions of your agreements with franchisees and key creditors. 

4. Employees

You will need to consider, where your model permits such flexibility, accommodating agile working practices within your own business. 

Franchisees operating within your system may also need to make arrangements for their employees in respect of leave, and you will need to be ready to respond to enquiries from franchisees and their employees.

Under the government’s recently announced JobKeeper payment scheme, employers (with a turnover of less than $1 billion that have lost 30% or more of their revenue comparable to a year ago) will be paid $1,500 per fortnight for each ‘eligible employee’.  An ‘eligible employee’ includes those who were employed as at March 1, 2020, in a full-time or part-time capacity, and casuals employed on a regular basis for longer than 12 months.

5. IT infrastructure

Ensure that your franchise has the appropriate IT infrastructure in place.

If your employees are working from home, make sure your systems are capable of enabling and sustaining this. 

It is important to also ensure you have relevant cyber security measures in place, as well as having an up to date cybersecurity insurance policy. 

6. Engaging with your creditors

You should maintain good lines of communication with your financiers, landlords and suppliers. You may be required to enter into alternative payment arrangements where your ability to meet your immediate financial obligations has been impacted by the crisis.

The government has announced a temporary hold on evictions and a mandatory code of conduct for commercial tenancies. Under these measures, evictions will be put on hold for the next six months for commercial tenants who meet certain eligibility requirements and are unable to meet their financial obligations. 

Rent reductions can also be sought based on a tenant’s decline in turnover. This is designed to ensure that landlords and tenants are sharing the financial burden. Banks are expected to support these arrangements in the implementation of the code of conduct. 

7. Communication

It is also important to establish and maintain clear lines of communication with your franchisees and staff.

Ensure that your franchisees provide regular updates as to sales, financials, and employee arrangements so that you can monitor the financial position of the business.

Conversely, also seek up to date information from your franchisees so you can work together (where possible) through this unprecedented situation. 

8. Seek support

The government has announced a raft of measures to support businesses impacted by the coronavirus. 

For example, employers are eligible for temporary cashflow support, receiving a payment equal to 100% of their PAYG salary and wages withheld (up to a maximum of $50,000). 

The government is also providing a guarantee of 50% to small and medium enterprise lenders for new unsecured loans to be used for working capital. 

It has also increased the instant asset write-off for eligible businesses.

By having a clear strategy in the face of this, you can help to ensure that your franchise, and the franchisees within your system, are in a position to bounce back once this crisis passes. 

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