Haynes and Boone's Newsroom

Jan Gilbert in Franchise Update: "Turning Around Struggling Franchises"
08/31/2010
Jan S. Gilbert

Two years of tight credit and reduced consumer spending have left many franchisees reeling and put a serious crimp in franchisors' royalty streams. Workout professionals and bankruptcy attorneys experienced in franchising discuss what franchisors can do to help turn around distressed units - without spending scarce funds or getting themselves into legal hot water.

Haynes and Boone Partner Jan Gilbert dicusses liability issues franchisors may face when dealing with struggling franchisees.

"The more you do as a franchisor, the more your exposure," agrees Jan Gilbert, a partner with Haynes and Boone in Washington, D.C. Any termination must be lawful under the franchise agreement and applicable law, he says. This typically means giving the franchisee notice and an opportunity to cure. It's relatively easy when the issue is non-payment of royalties or other fees to the franchisor, versus a shoddy operation where the premises are not clean enough or other standards are not being met because a struggling franchisee is cutting corners to survive.

But nothing is guaranteed, even if it seems the situation is black-and-white. "When you terminate a franchisee and there's no dispute that they owe money, it still can be contentious - the franchisee may claim the system isn't what you said, the point-of-sale system doesn't work, they can't get products, etc.," says Gilbert. "Each franchisee will tell you their situation is different, and to some extent they're right."

To help minimize potential liability, he says, franchisors who grant a royalty abatement, for instance, should condition it on a legal release from the franchisee. That way, says Gilbert, they can't come back and say, "The training you gave me six months ago is the cause of this." Also, he says, it's very important to notice any signs of impending problems as early as possible. Once the franchisee declares bankruptcy, an automatic stay takes effect, severely limiting a franchisor's options.

Excerpted from "Turning Around Struggling Franchises," Franchise Update, August 31, 2010. www.franchise-update.com. To read the full article, click here.