Statistically, buying a franchise promises better survivability than opening your own business. But despite the high success rate of many franchises, the possibility of bankruptcy is still there.
If you are a franchisee, your franchiser going out of business will naturally spark many anxieties. Will you lose your business entirely? Do you have to give up the business name? What about the contract?
These answers might provide you with some clarity.
The type of bankruptcy will affect the outcome for franchisees
There are two common types of bankruptcy proceedings: Chapter 7 and Chapter 11 bankruptcy. Whichever your franchiser chooses will impact you as a franchisee.
In a Chapter 7 bankruptcy, the franchiser no longer sees the business as viable and chooses to liquidate its assets. The proceeds are often used to pay creditors. In this situation, the franchiser will likely not be able to meet its contractual obligations. This means you may lose support for:
- Marketing
- Product development
- Supply chain
- Training
- Site selection and development
Your franchise agreement might address the contingency for bankruptcy, and you will need to follow the steps if this is the case. Otherwise, you may be able to sue for breach of contract or terminate your contract entirely.
On the other hand, a Chapter 11 bankruptcy is a way for a business to organize its debt while continuing contractual obligations. Therefore, you may be able to resume business as normal.
You may be able to continue the business, just without the brand
If your franchiser pursues a Chapter 7 bankruptcy, they may sell the brand as part of liquidation. In this case, you must remove their identification from your business if you wish to continue operations.
What if a third party buys the brand? Then you may be able to extend your license agreement with them and continue using the brand’s logo, name and other intellectual property.
Consider renegotiating your franchise agreement
In the event that a third party buys the franchise, you might have the opportunity to renegotiate the terms of your franchise agreement. For example, you can ask for reduced fees, better support, additional resources and other more favorable terms.
Going over the agreement with the new franchiser can also help you avoid potential issues down the line.
A franchiser’s bankruptcy doesn’t mean the end for your business. By taking proactive steps to mitigate the biggest risks, you can help secure your business’s future.