Pets Paradise problems just beginning for franchisees

The appointment of receivers to Pets Paradise this week did not include stores operated by franchisees, but franchising experts warn there are still difficult times ahead for franchisees.

The Pets Paradise and Billy Baxter’s businesses, which include the franchise networks, were both advertised for sale by the receivers Deloitte yesterday as Deloitte moved to ease franchisees’ concerns.

“Everything is being done to assure the franchisees are protected as far as what is happening to the company,” a spokesperson for Deloitte told SmartCompany.

Deloitte partner Tim Norman this morning held a conference call with franchisees, who were said to be “appreciative” of the update and of a number of initiatives and offers to support them.

“These include discounts on stock ordered from head office and, during the receivership, discounts on royalty payments,” the spokesperson said.

Deloitte has received “strong interest” from “a large number of parties” since the demise of the Pets Paradise and Billy Baxter’s businesses, which include the franchise networks, have been advertised from sale.

However, Jason Gehrke, director of the Franchise Advisory Centre, warned the receivership could result in problems for franchisees and the value proposition of the Pets Paradise brand.

“For the average person on the street, they are not going to notice any difference in a franchise system that is insolvent if the franchisees continue to trade,” Gehrke says.

“But if there are announcements of company store closures, that then affects consumer confidence as the average person cannot identify between company-owned and franchisee stores.

“If the receiver gets to the point where they are closing co-owned stores, that raises a challenge for franchisees to maintain a perception that it is business as usual.”

Gehrke says the receivership is also likely to cause problems for any Pets Paradise franchisees that are trying to sell their business.

“The uncertain future of the brand is obviously going to be significant to any potential buyer going forward and may delay those sales or reduce the value of those sales.”

Deloitte has been communicating with Pets Paradise franchisees but Gehrke warns that franchisees are often left out of the loop when a company collapses.

“The main thing is to be well informed by the receivers, managers or administrators and often that is not the case. As franchisees, they are primary stake holders in the brand, but they are not recognised as creditors and so are not entitled to the same disclosure of info that a creditor may be,” says Gehrke.

“As a franchisee you may not be owed any money by the business, but you might have put your life savings and house on the line to become that franchisee. But that doesn’t entitle you to the same level of information as a $100 creditor or a staff member who has been employed for a week.”

A particular concern for Pets Paradise franchisees is that they will not be able to trade on as normal as such a large percentage of their stock supply is controlled by Global Pet Products, one of the companies which is part of the Pets Paradise group.

“That may raise problems for franchisees if they are not able to get new inventory or if there is a liquidation of inventory, which the administrator and managers need to do to turn products into stock,” says Gehrke.

However, James Corne, managing director of The Franchise Institute, told SmartCompany it was likely the franchise agreements for Pets Paradise enabled franchisees to get supply from other sources in the event of company collapse.

“In the agreements with the franchisor it depends on the ability of the franchisor to access other suppliers. Generally there is a clause in there that, in the event of something else happening, they can access supply from elsewhere,” Corne says.

This story first appeared on SmartCompany.