Franchise Times Offers Tips on Preparing for Franchisee Bankruptcies

Franchise brands are uniquely well-equipped to survive the ongoing coronavirus pandemic and attendant economic recession. Unlike independent businesses, franchisees benefit from a wide network of support both from the franchisor and other franchisees. Still, the COVID crisis has created unprecedented challenges for virtually every business, and franchise brands are no exception. The question isn’t if some franchisees will face bankruptcy, but how many. 

Now more than ever, every franchisor needs to be prepared to support their franchisees through bankruptcies. On Tuesday, Franchise Times published a guide for franchisors who may not have already made such preparations. 

The first step, says Lathrop GPM attorney Robert Haupt, is looking for red flags.

it should start with looking for warning signs—a pattern of late payments, lack of communication, notices from lenders—and quickly responding. “Do you have a mechanism in your system for reporting up the chain that a franchisee is struggling?” questioned Haupt during a webinar discussion of how franchisors can prepare for franchisee bankruptcies during the coronavirus crisis.  

There are different types of bankruptcies, and not all of them require a dissolution of the business. Chapter 11 and 13 “both allow the franchisee to continue operations under a franchise agreement.”

“Most franchise agreements I've seen allow for some sort of expedited termination provision in the event of the franchisee's insolvency or bankruptcy,” said Will Jameson of law firm Spadea Lignana, in a separate interview. “Once a bankruptcy is filed, however, the automatic stay imposed under bankruptcy law prohibits the franchisor from enforcing termination or collection without bankruptcy court approval. As a practical matter, working with a struggling franchisee is frequently the best way to avoid the franchisee from seeking bankruptcy protection and the resulting loss of certain franchisor controls under the franchise agreement.”

Crucially, Franchise Times also points out that bankruptcy is not always the worst-case scenario for the franchisor, “because it can help that franchisee shed certain debts, which frees up capital for them to put into their property,” said Haupt. The key is being prepared to in advance to make the most of the situation.

For more tips, read the full article at franchisetimes.com.