For the past three years I have been working on a book, chronicling my experiences as a franchisee and sharing the experiences of other franchisees in a broad variety of industries. As you would expect as a business coach I am often sought out by new business start-ups, many of whom are exploring a franchised business. One of the most frequently asked questions is:

What happens if the Franchisor goes bankrupt?What happens if the Franchisor goes bankrupt?

In the up-and-down economy we have been dealing with it has been proven that no business is 100 percent safe from failure. In the case of a franchisor declaring bankruptcy, the franchisees face a unique set of challenges. The relationship between franchisor and franchisees is one in which the parent company collects fees from the private business owners in exchange for benefits that usually include marketing, training, and operational assistance. So what are the options when a franchisor declares bankruptcy?

First, it is important that the difference between a Chapter 11 and a Chapter 7 bankruptcy be understood. The Chapter 11 filing seeks protection from creditors while still operating and the Chapter 7 filing is a declaration of death! The franchisor is declaring insolvency which eminently leads to going out of business. In either case the support that a franchisee is promised in their franchising agreement is usually and immediately diminished, modified, or ends all together. If left to negotiate and fend for themselves, franchisees usually face extreme challenges in the terms of reduced buying power relating to supplier contracts, advertising, and most likely suffer shared credibility issues. Worse yet is where a Chapter 7 filing leads to the franchisees’ agreements being sold or transferred to another entity, which may result in the franchisees getting a new boss who does not support the original business model. In some cases, during the bankruptcy process the franchisee may be presented with the opportunity to branch out on its own – basically launching a new company leaving the franchise with the business shell but no developed name or branding. All the time, talent, and treasure invested in developing the brand is simply gone.

If you are involved in a franchise make sure you know your rights and most of all enlist the help of an attorney with direct experience in franchising. I am amazed how many of the franchisee’s I’ve interviewed who retained an attorney for the contract review but who failed to provide counsel on the long term liability picture. Franchising agreements are very different and always complex. Many are entirely burdensome to the franchisee. The right attorney will help the franchisees protect their rights during bankruptcy proceedings by organizing and perhaps even forming a group case that will carry more weight than an individual one. In addition, a practiced franchise attorney can also help the franchisee renegotiate better operational terms and even become the new parent company by buying the rights to the franchise at clearance prices.