What You Need to Know About Operating a Franchise During the COVID-19 Crisis

Latest posts by Jeffrey Goldstein (see all)

As a franchisee, operating during the COVID-19 crisis presents unique challenges. Not only must you contend with the economic impacts of the situation, but you must also continue to meet your contractual obligations to your franchisor.

While some franchisors are offering temporary financial relief to their franchisees during the COVID-19 crisis, others are not. Additionally, many franchisors are continuing to aggressively pursue termination efforts against non-paying and non-conforming franchisees.

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With this in mind, if you are a franchisee and you are struggling to stay in business during the pandemic, here is some important information for you to know:

Q: What should I do if I can’t afford my royalty fees or marketing fund contributions due to COVID-19?

For franchisees, royalty fees and marketing fund contributions can make it difficult to turn a profit even under normal circumstances. During the pandemic, many franchisees are finding that they cannot afford to pay these costs while also making payroll and remaining current on their other obligations. However, non-payment of royalty fees or marketing fund contributions is grounds for termination, so franchisees must be extremely careful about paying these when they are due.

Loan options are available (although the Paycheck Protection Program stopped accepting applications in early August), and some franchisors are now offering royalty deferrals and other “relief packages.” Before pursuing these options, franchisees must ensure that they have a clear understanding of all of the terms and conditions that apply.

Q: Does my franchise agreement’s force majeure clause excuse non-performance during the COVID-19 crisis?

The basic concept behind a “force majeure” clause is that it excuses contractual non-performance when circumstances beyond the parties’ control render performance impossible. However, some force majeure provisions are worded differently, and not all of these clauses will excuse performance due to COVID-19. To determine how your franchise agreement’s force majeure clause applies during the pandemic—if at all—you will need to have your agreement reviewed by a franchise attorney.

Q: Do I have to pay workers’ compensation if one of my employees contracts COVID-19?

While some states provide protections for certain employers in circumstances in which employees contract COVID-19, others do not. As a result, to determine your franchise’s obligations, you will need to review the latest updates to the laws in your state. Additionally, the federal Families First Coronavirus Response Act (FFCRA) has established a temporary right to paid, job-protected leave for employees who are diagnosed (or whose family members are diagnosed) with COVID-19, and other federal laws may apply, as well.

Q: What if I need to adopt social distancing protocols or other safety measures that don’t comply with my franchisor’s operations manual?

At this point, all franchisors should be working with their franchisees to ensure that they can implement appropriate safety protocols—whether they are required by state law or they are simply in the best interests of employees and customers. If your franchisor is not providing sufficient guidance or flexibility, or if you believe you need to do more than your franchisor is allowing, you should consult with a franchise attorney to determine what options you have available.

Q: Can my franchisor terminate my franchise agreement if I cannot pay my royalties or adopt safety measures that don’t comply with the operations manual during the pandemic?

Potentially, yes. Franchisors reserve broad termination rights in their franchise agreements, and this invariably includes the right to terminate for non-payment or non-compliance. While some franchisors may choose to grant concessions or offer leeway during the COVID-19 pandemic, they are under no obligation to do so. As discussed above, your franchise agreement’s force majeure clause might apply, but whether (and to what extent) it protects you will depend on the specific wording of your agreement.

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Q: What should I do if I am concerned about losing my franchise due to the COVID-19 crisis?

If you have not been paying your royalties or advertising fund fees, have received a notice of non-compliance, or you have any other reason to be concerned about the fate of your franchise as a result of the COVID-19 crisis, the best thing you can do is to be proactive about your situation. Do not take a wait-and-see approach to find out if your franchisor is going to pursue termination. Consult with a franchise attorney about the options you have available, and develop an informed strategy focused on shoring up your franchise’s finances, working with your franchisor to avoid termination, or preparing any potential legal claims against your franchisor.

Q: Is now a good time to pursue additional franchise opportunities?

While many franchisees are struggling due to the economic impacts of the COVID-19 crisis, others are thriving. If your franchise has experienced prosperity during the crisis, you might be thinking about opening a second outlet.

Depending on your financial circumstances, this could potentially be a good option. There are some incentives out there; not only concerning franchise opportunities specifically, but with regard to real estate leases, vehicle leases and other business costs, as well. Of course, you will need to carefully review the terms of your franchisor’s current franchise agreement or area development agreement, and you will need to carefully assess all of the various legal and financial risks involved, as well.

Q: What else do I need to know about operating my franchise during the COVID-19 pandemic?

While great progress is being made toward a COVID-19 vaccine, and while we are now nine months into living with the pandemic, there is still more struggle to come. As a franchisee, it is important to continue to approach the pandemic with a long-term perspective in mind.

Do you have the financial resources you will need to continue weathering the storm? Is it time to address concerns about your franchisor’s lack of response to the crisis? To protect your franchise to the fullest extent possible, you will want to move forward with eyes wide open and with a clear understanding of the practicalities at hand.

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