The immediate challenge for a franchisee of a bankrupt franchisor is how to stay in business during the franchisor’s bankruptcy. A Chapter 7 (liquidation) franchisor is not likely to meet any of its contractual obligations to its franchisees. This may also be true of a Chapter 11 (reorganization) franchisor, although many Chapter 11 franchisors do perform their contractual obligations during the pendency of their bankruptcy proceeding. In that case, a franchisee may be able to continue to conduct business as usual. However, if a franchisor ceases to perform its contractual obligations, franchisees will experience the loss of the system-wide marketing programs, training and operational assistance and supply chain support, all of which are essential to a franchise system. Additionally, in both Chapter 7 and 11 proceedings, franchisees will witness increased negative publicity concerning the franchise system, resulting in a loss of goodwill in the brand.
Loss of Franchisor Support
The loss of the system-wide marketing programs, training and operational assistance and supply chain support can be devastating to a franchisee. This generally occurs in a Chapter 7 proceeding or a Chapter 11 proceeding when the debtor does not plan on continuing to operate the franchise system. If a bankrupt franchisor ceases to provide its franchisees with this support, franchisees must take immediate steps to perform those services themselves or locate alternative sources.
Loss of Goodwill
There is a stigma associated with bankruptcy proceedings and the public’s immediate reaction to news of a bankruptcy proceeding is typically negative. This often results in a loss of goodwill in the bankrupt company’s brand and trademarks. Additionally, if company owned units close simultaneously with the franchisor’s bankruptcy filing, the public may mistakenly believe that all units, whether company owned or franchised, will shut down. The closure of company owned units further exacerbates the loss of goodwill in the brand and the trademarks, as occurred in the Bennigan’s and The Ground Round bankruptcies. In each of those cases, media outlets reported stories about each franchisor’s bankruptcy filing and the abrupt closure of their respective company owned restaurants. The goodwill of each brand was dealt a considerable blow.
Soon after a franchisor files for bankruptcy, a franchisee should act to dispel any rumor that its independently owned franchised business is closing, is in peril or is in any way harmed by the franchisor’s bankruptcy. A franchisee should immediately contact its local newspapers, radio and television news agencies to inform the public: (i) that the franchisee will remain open during the franchisor’s bankruptcy proceeding; and (ii) the bankruptcy will not impact the franchisee’s business.
The next step for a franchisee is to generate positive news and regain some of the lost goodwill. An effective way to do that is for franchisees to organize and form an advertising cooperative and to develop and implement a centralized marketing and advertising campaign. The advertising cooperative will have to assemble quickly and begin providing all of the marketing and advertising services previously provided by the franchisor.
If the franchisor no longer provides services or goods upon which the franchisee has relied, to remain in business a franchisee must somehow continue to obtain the necessary goods and services. The concern here is two-fold: (i) the franchisor is the exclusive provider of the goods or services but will no longer provide them; and/or (ii) the price offered to franchisees was only available because of the franchisor’s buying power. A franchisee should attempt to acquire goods and services directly from the franchisor’s suppliers or from other capable suppliers. If a franchisee is unable to acquire the goods and services, the franchisee must make the business decision to either acquire different goods and services or cease offering them.
With respect to the costs of purchasing goods and services, franchisees may lower their costs if they pool their resources and assert whatever buying power they collectively have. Similarly, franchisees should consider sharing in the costs of developing and implementing marketing programs. A common way franchisees can collectively take action is through forming advertising and purchasing cooperatives. If franchisees are able to effectively operate these cooperatives, franchisees may be able to assert their combined buying power and negotiate lower prices for goods and services, advertising and marketing materials.