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If a franchisor declares bankruptcy, what happens to the franchisees?

I'm considering purchasing several franchisee food restaurants but am worried that the franchisor might go into bankruptcy.
Jeff Elgin answered January 21, 2010
URL: http://www.entrepreneur.com/answer/222044
This is a great question but the answer is not necessarily direct or clear. There are at least two big issues involved in a bankruptcy that you want to stay far away from, if at all possible.

The first is that when any company goes into bankruptcy, the first claim to its assets goes to the company's creditors. That class does not usually include franchisees. Since things like the restaurant brand name and proprietary recipes or other trade secrets are assets of the franchise company, the court may very well end up deciding what should happen to them based on the considerations of the creditors--not the franchisees--and that could leave you in a position that is not at all in your favor.

The second issue, which is particularly serious in a Chapter 11 bankruptcy reorganization, is that most contracts of the bankrupt company must be reaffirmed or else they can be voided by the court.

In other words, you could have a contract like a franchise agreement and that contract could end up being voided without what you might feel is fair or reasonable consideration for your interests.

The bottom line: If you think there is any reasonable chance that a franchise company may go bankrupt then stay miles away from it unless you want some "interesting" experiences in your life!

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.