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

Get heaping discounts to books you love delivered straight to your inbox. We’ll feature a different book each week and share exclusive deals you won’t find anywhere else.
Jumpstart Your Business. Entrepreneur Insider is your all-access pass to the skills, experts, and network you need to get your business off the ground—or take it to the next level.
Are you paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.

Latest on Entrepreneur