Franchises

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

min read
Opinions expressed by Entrepreneur contributors are their own.
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!

More from Entrepreneur

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

In as little as seven months, the Entrepreneur Authors program will turn your ideas and expertise into a professionally presented book.
Apply Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.