Opening a franchise can be a lucrative endeavor. Many entrepreneurs view franchises as a wise investment, as the quality and popularity of the franchise’s products and services has already been established. A franchise often has widespread consumer awareness, which is worth its weight in gold.
However, numerous franchises have encountered dire financial straits in recent months. A growing number of franchisees and franchisors alike are filing bankruptcy—and this shows no sign of slowing down.
An uncertain future for franchisees
The 1990s, 2000s and 2010s were a golden era for franchises. Lenders were happy to finance franchisees’ dreams of opening a popular restaurant in their area. Franchisors’ profits soared as their franchisees sowed locations throughout the country. Opening a franchise seemed a low-risk investment with a predictable and near-certain return.
But the past several months have turned franchising on its head. The economic slowdown has brought many businesses to a grinding halt, and franchises are no exception. As a result, many franchisees have had no choice but to file bankruptcy. Not only are small, local franchisees filing bankruptcy but also international corporate franchisees. The most significant example is that of NPC International, the world’s largest franchisee of Pizza Hut and Wendy’s.
Filing bankruptcy for franchisees
When filing bankruptcy, most franchisees will qualify for Chapter 7 or for Chapter 13. Under Chapter 7, a franchisee can liquidate their business assets to repay their debts. In these cases, the trustee generally terminates the franchisee’s contract. Although the franchisee will no longer operate the restaurant, they have the benefit of clearing the debt the owe to the franchisor.
Chapter 13 allows debtors to restructure their debts through a repayment plan. Within three to five years, the bankruptcy court will discharge the petitioner’s remaining debt. Filing Chapter 13 has another major benefit for franchisees: although it does not ensure that they can keep the franchise, it does prevent the franchisor from taking back the contract until the franchisee finishes the bankruptcy process.