Franchisor Bankruptcy & System Collapse

Franchisor Bankruptcy & System Collapse

When the Franchisor Dies and the Franchise Implodes...

Beware. Franchisor Bankruptcy Can Ruin You.

Many assume that a well known franchise cannot possibly go bust. That is wrong. Just ask people familiar with Boston Chicken or Blockbuster. The latter of these is rapidly falling apart as competition from Netflix and others annihilate their brick and mortar operations. Yet, they still offer franchises and feature up-beat commentary on why you should become one. Keep in mind that although a franchisor failure can release you from your franchise obligations in some cases, it cannot pay you back for the years and millions you may have lost investing in a losing concept and a loser brand.

We are not bankruptcy attorneys and offer no advice relating to bankruptcy. However, as Denver franchise lawyers, we can tell you that lawsuits against franchisors who are near bankruptcy are not likely to result in any collectible judgment and should be avoided. For this same reason, you should look carefully at the profitability of your prospective franchisor and make sure that it has consistently made net profits and had ample free cash flow for many years in a row. Moreover, the majority of the gross revenues should be coming from ongoing royalties, and not from initial franchise fee collection. Anyone focusing on this would have avoided the Boston Chicken disaster, where the franchisor looked quite profitable since it was opening new franchises like mad, collecting initial franchise fees, but the franchisees themselves were having a very rough time and royalty revenue was therefore paltry. If you have questions about your franchisor, call us.

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