Vaccines to Come, but in the Interim, Preparation Is a Franchisee’s Best Friend

Perhaps more than others, small business owners have found it difficult to weather the sudden and seemingly endless rounds of shutdowns, restrictions, moratoriums, and reopenings. With fewer financial resources at their disposal and a steady upward trend of new Coronavirus cases, even with the almost-tangible feeling of hope that arrived with news of an effective Covid-19 vaccine, it may be a long and painful winter before things get back to normal.

For franchisees—especially young franchisees establishing their first outlet or expanding a brand to new territories—the months ahead may be difficult, but they do not need to be catastrophic. Below are a few tips for franchisees to keep in mind as they make the most of a difficult situation:

Take a close look at your franchise and/or development agreements’ notice and termination provisions.

Many franchise and development agreements require a franchisor to notify you if you are behind on royalty payments, furnishing or equipment upgrades, or development obligations before they can terminate your agreement or take adverse action against you. Your agreement may even provide an opportunity to cure the default within a (short) period of time. In addition, some state laws also offer franchisees notice and cure rights, even if your contract does not.

Look for cross-default provisions.

Some franchise agreements allow for the termination of a franchise or development agreement if a franchisee or developer defaults on another obligation, such as the lease on a vehicle or piece of real estate used in connection with your franchise. If your agreement has a cross-default provision, then remaining current on vehicle and real estate payments is as important as remaining current on royalty and other payments to the franchisor. And in some states, Covid-related protections may allow you to preempt a default by notifying your lessor that you are unable to make payments at this time.

Don’t underestimate the power of conversation.

Talking with a franchisor about the troubles you are having may be unnerving, but many times, it is worthwhile to do so. Most franchisors want their franchisees to succeed because their success betters the overall brand. If you are not upfront about the obstacles you are facing, your franchisor cannot help you overcome them. In these difficult times, trust that your franchisor will respond positively to your request for support.

Understand your exit options.

Regretfully, some franchisees will not survive the current economic downturn, but you do not have to throw in the towel and accept the financial losses that come with closing a business. You may have the right to sell your franchise, return branded property or inventory that you purchased from the franchisor for a refund, or even exercise early termination rights that require a franchisor to refund your full investment. If you bought a franchise because of misrepresentations about the brand’s health and performance during the pandemic, or even based on misrepresentations concerning the brands pre-pandemic financial health, you may have legal rights you can exercise. And if you have realized that your franchisor treats you like an employee rather than a business owner, you may have a right to employment benefits notwithstanding your franchise agreement.

It is true that 2020 is over, but the ramifications of what has happened will be with us for a long time. It is more important now than ever to keep an eye on your rights and obligations.


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