Given the current state of the economy, unfortunately, more than a few franchise companies have been forced to declare bankruptcy.  When this happens, what can the franchisees do to protect themselves and preserve their own investments?

 

Well, here are a few tips.  First, once it has been disclosed that the franchisor has gone bankrupt, the franchisee must pay close attetion to the case.  Is the bank forcing the company to sell off its most profitable stores or the entire franchise system?  A sale of the entire system could result in signigicant changes in leadership and effect the way that a franchisee conducts his or her daily business.

 

Secondly, the franchisee needs to determine if the franchisor has met its obligations under the franchise agreement.  If by selling, the franchisor has failed to meet its obligations, then the franchisee can contest the assignment to the new buyer and exit the franchise system.  This is not usually a favorable way to proceed since there has been significant monetary investment up to that point and walking away leaves the zee with no real ability to further make good on their investment.

 

Finally, the franchisee should understand who the new buyer is and whether the buyer will be able to effectively run the franchise system.  Again, the franchisee can challenge the assignment to the buyer if the buyer is deemed inadequate.  But the franchisee needs to conduct their due diligence on the buyer to determine if the change in ownership will be beneficial to the  franchise company in the long run.