The Metropolitan Coporate Counsel:

Franchisors dealing with financially distressed franchisees will find that three maxims generally hold true: an out-of-court work-out is usually preferable to a Chapter 11 filing or receivership; if bankruptcy or receivership is unavoidable, a pre-packaged or pre-negotiated restructure plan is usually more beneficial than one imposed by a court; and being prepared is always preferable to being caught by surprise. Even if discussions ultimately fail to produce an agreement, a franchisor can leverage a franchisee default and the ensuing negotiation process to improve its position in a contested Chapter 11 case or receivership proceeding to its benefit by correcting irregularities in default notices and franchise documents, obtaining additional collateral or guaranties and the like.

Of course, in order to take advantage of these opportunities, a franchisor must be aware of a franchisee’s financial problems sufficiently in advance of a crisis to avert a precipitous filing and be prepared to engage in dialogue with the franchisee, its primary secured lender(s) and perhaps other key creditors.

Signs Of Economic Distress
Slow Pay (or No Pay) : Pay attention to history and stay on top of your receivables. Deviations in a franchisee’s historical payment pattern are a pretty good indication that something is amiss. A deviation from the historical norm can also (and often does) indicate liquidity problems. Early inquiry into the nature of any difficulties is advisable. Depending on the severity and persistence of the situation, the franchisor has several options, which can be combined or pursued individually: temporarily deferring or abating rents, royalties or other fees; issuing a notice of default; entering into a work-out agreement for past and future amounts due; and/or evaluating the desirability of closing, transferring or acquiring one or more units.

Continue reading Valerie P. Morrison’s article.

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