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Industry Snapshot – Franchisor/Franchisee
There are a couple of important factors that distinguish this industry from many others in a workout situation. Two crucial areas include:
• The relationship and contractual agreements between the Franchisor and Franchisee
• The status and relationship with the Franchisee’s landlords.
Franchisors are much more than a creditor to the Franchisee. As the holder of goodwill and intellectual property, the Franchisor will contractually protect those assets. Contractual rights are typically identified in the franchise agreement, which include royalties and fees, advertising requirements, non-compete, capital expenditure requirements, etc. These rights and restrictive covenants often lead to tensions between the Franchisor/Franchisee. In a bankruptcy filing, the franchisor may have veto power over the assignment of franchise rights. This restriction can become problematic in a reorganization whether existing ownership wants to assume the existing franchise agreements or if they prefer to sell the assets and agreements to a third party.
Multiple location franchisees may bring another layer of complexity when dealing with landlords. In some instances, there can be two landlords for one property – one for the ground lease and another for the building. If the leases are above market, an opportunity may exist to negotiate with the landlords during the workout in order to to free up some liquidity. For marginally profitable locations, such critical discussions could impact whether or not the location is financially viable. If it is not viable, then bankruptcy presents a method to reject leases at these locations and close them.
I have highlighted two critical differentiating factors in the Franchisor/Franchisee space. Ultimate success in any restructuring also includes the exchange and dynamics with secured and unsecured creditors, equipment lease creditors, business viability, same store sales data, operating costs, etc.
If you become mired in such special situations, tread carefully. It is often wise in such cases to seek outside expert counsel – someone with substantial industry experience who can bring perspective, value and positive resolution.