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The Effect of COVID-19 on Franchising

In October, the attorneys at Carter & Tani attended the virtual American Bar Association Forum on Franchising’s annual franchise law seminar.  A wide range of topics was  discussed.  We will be sharing some of what was discussed during the various workshops and our thoughts on those discussions through a series of blogs. Since COVID-19 is a topic that is unavoidably in the front of all of our minds, we will start with that.

Franchise systems have been affected in different ways by the COVID-19 pandemic.  Some franchise systems with franchise businesses that had to cease operating or had their operations severely limited  have been impacted significantly on both the franchisee and the franchisor level.  Some franchise businesses, such as restaurants with carryout and delivery services, commercial cleaning service businesses, and home improvement businesses, have actually seen an increase in business and revenue during the pandemic.

The panel discussed what things franchisors are doing that have helped the franchisees in their system during this challenging time:

  • Provide clear leadership and direction on how the franchise system can uniformly address issues relating to the pandemic.
  • Be in regular communication with the franchisees.
  • Develop a franchise system-wide policy based on established company values to aid franchisees in uniformly addressing issues related to the current challenging political atmosphere.
  • Provide information as it becomes available to help the franchisees navigate the challenges of the pandemic (i.e., how to apply for loans, obtain PPE).
  • Waive or temporarily defer fees payable to the franchisor.
  • Extend deadlines for opening new franchises businesses.
  • Postpone deadlines for upgrades or other required investments in the franchise business.
  • Generally being more flexible.

Of course, it can be a challenge for franchisors needing to provide direction to franchisees who are in all different locations and under differing local restrictions and government orders and who have differing views and concerns.  Franchise systems typically strive to provide a uniform image and uniformity in the operations and the products and services offered by its franchise businesses. Having a continuing dialogue with franchisees during which they can express their concerns is helpful for all.

We have seen some of our own franchisor clients respond in various ways to give direction to and provide accommodation to franchisees in this difficult time, including:

  • Creating new ways for the franchisees to offer services and products to their customers.
  • Provide COVID-19 procedures to help franchisees meet safety guidelines and compliance with governmental orders and to provide a safe environment for employees and customers.
  • Developing PR communications to the franchisees’ customer base, assuring them of safety measures being taken within the franchisees’ business.
  • Temporarily deferring payment of royalties.
  • Holding off on proceeding with legal actions against underperforming franchisees.

We have also seen that some franchisors are continuing to sell franchises and there are parties interested in investing in franchises during the pandemic.  Whether franchise sales are still being made is largely dependent upon the impact that the pandemic has had on the industry in which the franchise system operates.  Some prospective franchisees have lost their jobs and are seeing this time as an opportunity to own their own business and have more control over their future.

In addition to the typical due diligence done in “normal” times, prospective franchisees looking to buy a franchise now should investigate how the pandemic has impacted the franchised businesses and what steps the franchisor has taken and continues to take to provide leadership and assistance to its franchises in this difficult time.