Importance of the Franchisor's Financial Position

A case currently before the New Zealand courts highlights the importance of franchisee’s understanding the franchisor’s business model and financial position. Nathans Finance collapsed on 20 August 2007 owing some $174 million.  It is now being alleged – in criminal proceedings against the former directors of the parent company – that the financial information published by Nathans was untrue with regard to its lending to related parties. 

Nathans Finance was a wholly owned subsidiary of VTL Group (formerly Vending Technologies), a listed company on the NZ exchange.  VTL was the franchisor of the ‘24seven’vending machine franchise business which had 76 franchisees in Australia/NZ and over 30 franchises in California and Texas, which were subsequently sold by the receivers for about $8 million in total.  VTL also had a European presence with “Shop24”, another sophisticated vending machine enterprise. 

Nathans Finance was the principal funding source for the franchisor, and by the time of the collapse some $170 million had been loaned to VTL and associated entities and despite Nathan’s prospectus claiming that its loan book was diversified (and secured) only 6 loans for about $5 million were to unrelated third parties.  

In its own way as spectacular as the Kleenmaid collapse in Australia in 2009, the lesson for franchisees is to ensure that they have at least a basic knowledge of how and where the franchisor derives its income.  

Ideally a review of the franchisor’s financial position should be undertaken by the franchisee (or their financial adviser) as part of their pre-investment due diligence process.