Protecting your business in distress situations: franchisees / licensees

22 April 2020

This is the second of our two part series in which we look at the issues facing companies looking to do business in the UAE during the time of COVID-19.

The first quarter of 2020 has just closed and many well-known brands, and not so well known brands, around the world are feeling the impact of some of the most difficult trading circumstances in living memory.

The repercussions of the COVID-19 restrictions that have rightly been put in place by Governments around the world, have been devastating for many businesses across a variety of commercial areas.

Without shoppers being able to come into your stores, no-one eating in your restaurants, or travellers not boarding your planes, trains or other automobiles, how are you supposed to maintain your business and get yourselves ready for the time when restrictions will be reduced or lifted? Could it be too late by then?



In a region such as the Middle East where many businesses are local franchises of international brands, it can also mean that the success or otherwise of your business, is reliant on the international partner remaining solvent and in business.

If you are a franchisee, licensee or distributor based in the UAE or wider gulf region, what should you be doing at this time to safeguard your business and/or improve upon your position?

1. Review your agreements

As a first step, it is important to locate and review your franchise/licence/distribution agreement.

What provisions are made for circumstances such as this, particularly if the current trading climate means that you may not have the support of the international partner?

Does the agreement provide you with any ability to continue to use the brand or deal directly with the franchisor's supply chain, in the event that the franchisor is facing business difficulties/disruption?

2. An alternative to force majeure or termination

It is important to stop and consider whether this highly unusual situation creates an opportunity for you.

If your business was in good health prior to the pandemic, and you see a future for the business once the restrictions are lifted, do you really want to bring the relationship to a close, or would you prefer to try and strengthen your position for the future if there is an opportunity to do so?

Rather than exploring the contract for the Force Majeure or Termination provisions, the current crisis may present an opportunity for partners in this region to approach the international company with possible rescue packages. It is worth considering whether a cash injection could provide you with greater control over the business and operations. Could it bring you an option of acquiring the business, or a stake in the business, or an interest in the brand either for the region, or globally?

There have been recent examples, pre-COVID-19 where international retailers may have closed their stores in other territories or regions, but stores have remained open and trading in this region. For example, Mothercare, which it is reported[1] closed 79 stores in the UK, but maintained over 300 stores in the Middle Eat and Russia, operated by its Kuwaiti partner Alshaya Group.

Similarly, the restaurant brand Carluccio's in 2018 closed a number of its outlets in the UK, but maintained its outlets in the UAE and wider region. It was reported[2] at the time that the Dubai headquartered business, Landmark Group, invested a further USD 13 million into the brand. Carluccio's went into administration on 30 March referring to challenging trading conditions exacerbated by COVID-19, it has however been reported that the Middle East operations will continue.

These are examples of where it would appear, local franchisees from within this region, have explored opportunities with the brand owner.

Could this be an option for you, if as a local franchisee, you see that your business partners overseas are showing signs of business distress? The current circumstances may present options for local partners who are willing to invest to secure the long-term future of their business by taking an equity stake in a well-loved brand, which happens to find itself in distress.

It may also be an opportunity to invest in the franchisee. It has recently been announced that a UAE based private equity business has invested in the regional franchise partner for the Canadian F&B business, Tim Hortons[3]. This took place shortly before the COVID-19 restrictions took effect, but it again shows the opportunities which may exist for those looking to invest.

As a franchisee, if you are looking at potential investors, you will also need to revisit your agreement with the franchisor, to ensure that there are no provisions which may negatively impact your franchise agreement in the event there has been any change in ownership - for example, could a change in ownership be a termination provision?

3. Looking to the future

As almost all businesses are having to change the way in which they are working, it also provides an opportunity to learn from these times, adapt, and look to the future.

When reviewing the agreement which is in place, consider whether there are provisions which could have assisted you further, which were not included in the current agreement. These may be provisions such as options for right of first refusal should the international partner be looking to divest, or options for exclusivity for the region, or something which provides more autonomy over and above a franchise arrangement. It may be too late for this agreement, but these could be raised on any renegotiations, or in any other agreements you may be looking to enter in future.

In recent years, more and more local companies have been embracing e-commerce and online dealings with clients/customers. Whilst it may have initially been a slower uptake in the region to elsewhere, it is now a fast growing area of the economy. But what about your business? What has been your level of e-commerce/online engagement to date with your customers? It has been a highly unusual time where we are all house-bound and reliant on home deliveries, but if it has taken this to show your business the opportunities through online engagement and sales, is this an area to build on going forward.

We may all see changes in how we work following these restrictions, and we may find that we see differences in how consumers shop etc. There may be an even greater take up of online services going forward. Be ready and prepared for such developments.

As the COVID-19 restrictions move on, we may all notice forced changes in how we work or engage with customers/potential customers. These changes could actually mean improvements or viable alternatives to how we "used to do things". It is an opportunity for us, and for you to use the learnings from this time to try to help you and your business in the future.

In closing

In summary, if you are a franchisee, licensee or distributor based in the UAE or wider gulf region, recent events may provide you with an opportunity to cement or improve upon your relationship with your foreign principals. At a time when economists are expecting a V-shaped "short sharp" recession, now could be your time to speculate and come out of the other side of this pandemic in a stronger position than when you entered it.

Read the previous article in this series, protecting your business in distress situations: brand owners.

Footnotes

[1] Mothercare to remain open in the Middle East amid shutdown of UK stores

[2] Dubai's Landmark Group To Inject $13.2 Million Into Carluccio's Rescue Plan

[3] Dubai-based Gateway Partners takes 40% stake in Tim Hortons' Gulf franchise


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