Buying a franchise: what if the franchisor becomes insolvent?

When buying a franchise, you will usually focus on whether you can finance your own outlet. But an equally important question is what happens if head office runs out of money. A franchise network connects independent business owners through a shared brand, supplies and technology. Financial trouble affecting one partner can therefore spread to others. Before signing, check not only the franchisor’s financial stability but also whether you could keep trading if it became insolvent.

1. Identify the companies you actually depend on

The trading name may not match the name of the company you sign the agreement with. One company may own the trade mark, another may run the ordering system, and a third may take payments for stock. To assess the risk, you need to identify the specific legal entities and their roles, rather than relying solely on the brand’s story.

Ask for a simple overview of these relationships: who your contracting party is, who receives your advance payments, who grants the licence and who provides the services essential to day-to-day operations. Pay particular attention where a Czech partner obtains its rights from an overseas head office. Problems can arise at either level.

For Czech companies, check the Commercial Register, the Collection of Deeds and the Insolvency Register. Have an accountant review the financial statements, focusing particularly on equity, debt, liquidity and trends in financial performance. Missing accounts are not, in themselves, proof of insolvency, but they are a reason to ask further questions.

A clear search of the Insolvency Register is not confirmation of financial health. Also ask about overdue liabilities, significant disputes and reliance on funding from related parties. Request written answers that state the date to which they relate.

2. Distinguish contractual protection from insolvency rules

The Czech Republic has no dedicated franchising law or mandatory registration scheme for franchise offerings. Nor is there a specific statutory disclosure document that franchisors must always provide before signing. However, the general pre-contractual rules of the Czech Civil Code apply, including the duty to disclose relevant factual and legal circumstances affecting the conclusion of the agreement.

A franchise agreement is generally entered into as an innominate contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Rules governing its individual elements, such as licensing or the purchase of goods, also apply. In the event of insolvency, Act No. 182/2006 Coll., the Insolvency Act, comes into play.

Insolvency does not automatically mean that every outlet must close immediately or that every agreement ends. The consequences depend on the type of insolvency procedure, the extent to which obligations have been performed and the specific contractual relationships. For certain contracts with outstanding obligations on both sides, the insolvency administrator may have statutory powers affecting further performance.

A clause stating that ‘the licence continues in the event of insolvency’ is therefore not enough. A lawyer needs to assess how far that commitment is enforceable and whether the franchisor can actually secure the continuation of rights and services provided by others. The European Code of Ethics for Franchising is a self-regulatory standard, not legislation or a guarantee that you will get your money back in an insolvency.

3. Limit the money and operations tied to head office

List every amount the franchisor will hold in advance: the initial franchise fee, deposits for equipment or stock, and prepaid services. For each item, specify what you will receive in return and when. If insolvency occurs, money paid before goods or services are provided may become a claim with uncertain prospects of recovery.

Prepare specific proposals for negotiation:

• Staged payments: link payments to verifiable delivery of specific goods or services, rather than simply to calendar dates.
• Limits on prepayments: avoid paying long-term operating charges in advance without a clear commercial reason.
• Security for larger advance payments: ask a lawyer to assess suitable escrow arrangements or a bank guarantee, including the precise conditions for their use.
• Documentation for goods you have paid for: establish when ownership passes to you and how your goods will be identified if they remain in the supplier’s warehouse.

None of these measures is a universal solution. For example, a guarantee from another company in the same group may be worth little if financial trouble affects the whole group.

Alongside the financial exposure, map your critical dependencies: access to orders, bookings, accounting records, mandatory supplies and the right to use the brand. For each, establish whether a legally and technically viable alternative exists. Simply knowing a password does not entitle you to continue using someone else’s system or trade mark.

4. Plan how to respond to early warning signs

Before signing, seek a contractual duty to notify you of events that could seriously jeopardise head office’s ability to meet its obligations. Examples include the loss of a key licence or interruption of an essential service. Also agree a named contact and a procedure for handing over operational records to which you are entitled.

Prepare a contingency checklist: who to contact, which records to retain regularly and which expenditure can safely be paused. Include contracts, invoices, payment confirmations and delivery or handover records. Any alternative supplies or switch to another system must comply with contractual obligations, intellectual property rights and data protection requirements.

If insolvency proceedings do begin, do not stop paying or unilaterally set off claims without first obtaining legal advice. Monitor published decisions and deadlines; an ordinary request for repayment of an advance may not be enough to lodge your claim.

Practical takeaway: Before buying, ask for a map of your dependencies on head office, a breakdown of prepaid amounts and a legally reviewed business continuity plan. The promise of a strong brand is no substitute for protection if its provider stops meeting its obligations.