Be Prepared in Case Your Franchisor Fails

The Wall Street Journal writes that the last thing someone thinks about when buying a franchised business is what happens if the franchiser declares bankruptcy.

But in this dicey economy, it is wise for both current and would-be franchisees to prepare for such a possibility.

In recent weeks, casual-dining franchiser Bennigan's, which had been run by Texas-based Metromedia Restaurant Group, filed for Chapter 7 liquidation -- a going-out-of business proceeding that immediately closed 150 company-owned restaurants. The 138 Bennigan's that franchisees ran weren't included in the filing.

Also, franchisers Mrs. Fields Famous Brands LLC, a cookie and frozen-yogurt outfit, and Realty Information Systems Inc., which operates the Help-U-Sell Real Estate chain, filed for reorganization under Chapter 11 of the federal bankruptcy code.

Under Chapter 11, a company remains in business while it works out payment arrangement with its creditors. That plan may require a financial restructuring, including asset sales.

While franchisees have little protection from such events in their contractual agreements, there are steps they can take to help limit the damage to their businesses.

One is to have a contingency plan in place so you won't be making a hasty decision if your franchiser suddenly goes out of business, says Bob Richards, a franchising attorney with the Chicago firm of Sonnenschein Nath & Rosenthal LLP.

"Make sure you have an exit plan to rebrand [with a different franchiser] or go independent," he says. Often, a franchised system can "implode very quickly."

That involves doing your homework on what other affiliations would fit your location and your business style. Also consider the consequences of going it alone -- including having to line up vendors yourself.

Another safety net is to have a bigger hand in maintaining the health of one's business by joining a franchise that has an independent franchisee association.

Such a group will have more bargaining power than an individual franchisee when dealing with the franchise on operational issues, advertisements and promotions. It also could give franchisees greater clout with vendors and lenders.

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