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Franchise Bankruptcy - What if the Franchisor Declares Bankruptcy?

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As a franchisee, you may experience a few signs that indicate something is amiss within the organization before the franchisor declares bankruptcy. How can you be prepared in this event?

Franchisee's Rights

If bankruptcy should be declared, the franchisor loses all rights to the name of the franchise. Therefore, the franchisees are allowed to continue operating under the current franchise name if they wish. However, if the franchisee does not want the association to the bankrupt franchisor remaining, but still wishes to continue the business, he or she may decide to create a new name.

Payment Changes

When bankruptcy takes place, the payment terms outlined in the franchise agreement become null and void. Therefore, royalty payments should be discontinued.

Obtain Assistance

If you find that anything does not seem right, it is important to contact other franchisees in the organization and obtain some legal assistance, preferably as a group. For example, if royalty payments should still be collected as the company files for bankruptcy, this would be a red flag to band together and meet with an attorney.

It can be beneficial to work in conjunction with the other franchisees in order to lessen the burden that the bankruptcy has on the structure as a whole. You will want to brainstorm strategies for keeping a smooth flow for customers. You should also consider ways to combine resources for marketing and advertising efforts.

Try to avoid any negative publicity up front in this type of situation. Enlist the support of the media to get the word out as to your position in continuing to operate the business.

Continue Operations

Make sure you plan and work ahead in continuing to run the business. Notify your customers personally about the transition, so that they know what to expect with regard to any changes. Let them know you are working on their behalf to continue to serve them well.

Plan to meet with vendors and any other business contacts quickly. It is important to do everything you can to maintain adequate supplies to create a transition that is as seamless as possible for your customers.

As long as you are pro-active during this period, you and your clients should enjoy a fairly smooth transition.

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