The COVID-19 pandemic has caused financial struggles for many franchise systems, including IHOP, Pizza Hut and Subway. Unfortunately, many businesses are going to continue to struggle as the pandemic exacerbates preexisting financial struggles.
Franchisors need to be proactive and look for warning signs from franchisees, in the form of late payments, lack of communication, etc. They should also ask themselves whether or not they want to keep the franchisee in the system.
“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.”
If a franchisor decides to intervene before a bankruptcy is filed, they may want to consider selling the franchise to another franchisee or terminating a contract.
It always may not necessarily be a bad thing for the future of the brand if a franchisee does file for bankruptcy, as it can help alleviate debts and free up capital.
Read more about COVID-19 bankruptcies in this June Franchise Times article, which includes information from Spadea Lignana attorney Will Jameson.