HOW TO HELP YOUR FRANCHISING CLIENTS SURVIVE THE RECESSION

Franchisors and franchisees have a better chance at weathering the current economic turmoil than plenty of other entrepreneurs, given the organizing principle of the franchising industry-namely that in war as in commerce, there is strength in numbers.
 
But they aren't immune to trouble, and if you count franchisors or franchisees among your clients, they may soon come to you for help in surviving the ongoing downturn in the economy. The good news is that the legal ties that bind franchisors and franchisees-along with the ties that bind franchisees to landlords, lenders, and vendors-contain enough wiggle room to give all of these parties a chance to come away from hard times still doing business with one another. This is true even though franchising agreements typically give the upper hand to the franchisor, just as leases and loan documents typically give the upper hand to landlords and lenders.
 
The bad news is that, for franchisors, making use of that wiggle room is the last thing they want to do, since it involves violating the sanctity of two items at the heart of franchising-royalties and fees for advertising and marketing. Specifically, it means taking a cut in these revenue streams, either by reducing them temporarily or by deferring payments for a struggling franchisee.
 
Royalties and ad fees commonly vary with the franchisee's revenues, and in any economic downturn they can constitute a substantial drag on the working capital of a struggling franchisee. In a worst-case scenario, they can threaten the franchisee's enterprise, not to mention the franchisor's.
 
Franchisors, however, do not readily agree to accommodate struggling franchisees with reductions in these revenue sources even in hard times, in part because royalties and ad fees are the lifeblood of their own enterprises, and in part because, if a particular franchisee gets a cut in royalties or ad fees, others will want the same. Clearly, for the franchisor, taking a cut in royalties or ad fees is a last resort, to be undertaken only under extraordinary circumstances-and only for as long as it takes to get things back to normal. The lawyer who negotiates such an accommodation thus faces no easy task.

Click here for the rest of Barry's article that was recently published in the October 2009 ALI-ABA Practical Lawyer Magazine.