Canadian Franchisor bankruptcies and their implications

One of the appeals of franchising is the added security provided by the law of large numbers. Meaning that in the case a few branches begin to struggle, the ‘body’ of the business will survive. With many proven successes, franchisors grow to enormous size and with it their purchasing power and brand recognition. This, however, does not make the franchisor impervious to crippling class action lawsuits or other actions that can lead to bankruptcy.

Looking at previous cases where franchisors filed for bankruptcy protection provides a glimpse of what franchisees may face. Recently, Bennigans filed for chapter 7 bankruptcy, ceasing all operations and liquefying its assets. What followed was the closing of all corporate-owned stores and a pool of franchisees with bewildered looks on their face. Franchisees took to advertising that yes, they were still open despite their franchisor’s bankruptcy. Fortunately for them suppliers upheld their side of contracts and continued to provide stores with much needed supplies.

Another consideration is that although a franchisor cannot pay their bills it does not mean the business itself is not profitable. Continuing with Bennigans, following their bankruptcy, they were snapped up by Atalaya Capital Management. Helped by CRG Partners, well renowned turnaround experts, Atalaya set up a framework to deal with whatever issues the remaining Bennigans franchises faced. Being that Atalaya was a senior lender to S&A Restaurant Corp (bankruptcy-filing owners of Bennigans) and used their position to vote for liquidation, the whole ordeal is a bit murky. More on the Bennigans story.

The principle one can take away from this though is that more than naught, some other, more financially sound company will take over. This held true during 2007-08 when many faltering banks were acquired by others. Bluemaumau.org provides a list of various franchisor bankruptcies and a brief synopsis of what occurred afterwards. Notable names on the list are Boston Market, 7-11, Denny’s, Sizzler and Days Inn.

As you can see when franchisors go bankrupt, it does not necessarily mean it is the end of the road. Many times a bloated conglomerate is forced to realize they must restructure to survive and use bankruptcy as a tool to streamline or update their models. Other times, franchisees have taken over the reins to successfully reinvent themselves and remain competitive. The period immediately following a filing may create panic or confusion, but long-term, bankruptcy does not eviscerate a franchisees ability to survive.