Joel Libivia of Small Biz Trends interviewed Rush Nigut, an Iowa Franchise Attorney, about what a franchisees options are when a franchisor goes under:
Small Business Trends: What is the first thing franchisees who finds themselves in this situation should do?
Rush Nigut: The first thing a franchisee should do if the franchisor is in trouble is to review the franchise agreement to make sure the franchisor is meeting its obligations. If not, a franchisee will want explore whether there is a breach of contract and whether the franchisee can possibly terminate the agreement if that makes sense.
Small Business Trends: Franchisees spend a lot of time and money to find and keep customers. Can they keep their customers if the franchisor goes under?
Rush Nigut: Obviously, franchisees will want to keep their customers or clients; they’ve worked hard to get them. But they need to make sure that they avoid any non-compete enforcement. Many franchisees are under the mistaken belief that the customers belong to them. Instead, the termination provisions and non-compete provision written into franchise agreements tend to favor the franchisor.