What happens to franchisees when franchisors file bankruptcy?

| Jul 14, 2020 | Business & Commercial Bankruptcy |

When you decided to open a franchise, you selected it based on its strong branding and its reliable likelihood of making a profit. You chose a franchisor that you believed would endure for several years, if not for the rest of your life.

Unfortunately, that did not happen. Your franchisor has recently filed bankruptcy—and you do not know what comes next.

The next steps for franchisees

Franchisors who petition for bankruptcy usually do not have any obligation to notify their franchisees. As a result, some franchisees do not hear about their franchisor’s decision until the news media announces it. It is crucial that you take proactive measures to protect your finances. These are some of the major steps that you must take:

  • Review the franchise agreement: Franchise agreements enumerate the obligations of both franchisee and franchisor. If your franchisor cannot meet its obligations, then you may have a breach-of-contract case or grounds to terminate your contract. If your franchise agreement addresses the contingency of franchisor bankruptcy, then you must adhere to the steps in the contract.
  • De-identify the franchise: If you extend your license agreement, then you may continue to use your franchisor’s logo and other branding materials. If not, then you must de-identify your retail space—often at your own expense.
  • Figure out the commercial lease: Most franchisees do not enter a lease with the landlord; they sublet the space from the franchisor. If the franchisor and landlord terminate the lease, then it will be up to you to renegotiate the lease directly with the landlord, to move out or to sign a lease with a different landlord.
  • Consult an attorney: One of the best things that you can do to learn about your rights is to consult a bankruptcy attorney. Your lawyer will assess your circumstances, explain your options and help you make wise business decisions.

Although most franchise contracts are very similar, your situation is unique. There is no one-size-fits-all approach to handling your franchise. Take the time to learn about your franchisor’s decisions, consider what you want your future to look like and decide what to do about your franchise.

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