Coronavirus (COVID-19) and Franchising | Franchise Law Blog

Coronavirus (COVID-19) and Franchising

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For franchising, franchisors, franchisees, entrepreneurs, and business owners, the COVID-19 Coronavirus pandemic is altering the course of history and challenges the existence of businesses across the country.  Within this blog post we provide an overview of the impact of COVID-19 on franchising, how franchisors can respond to this crisis, legislative updates, helpful links, and news. This blog post will be continuously updated.

Coronavirus (COVID-19) and Franchising

Franchising is the growth engine that supports hundreds of thousands of small businesses across  America. The relationship between franchisors and franchisees is one of interdependence where franchisors supply brand, training, systems, and supply chain, and franchisees supply capital, time, and work effort. The COVID-19 pandemic has significantly impacted the franchise community and has caused uncertainty and economic pain. Franchisees face cash flow shortages from declining customer sales and franchisors face cash flow shortages from declining royalties. The interdependence between franchisor and franchisee becomes tested and, at this early stage in the Coronavirus pandemic, franchisees and their Franchise Advisory Councils are:

Many franchisors, depending on their level of capitalization, are faced with the same economic challenges as their franchisees. With potential reductions and restrictions on the receipt of royalty revenues, franchisors are presented with economic challenges related to maintaining franchise sales and the necessary cash flow to support internal operations that now, more than ever, remain critical and necessary for the entire franchise system. How severe these issues are or become will, in large measure, depend on how long this pandemic lasts and the length of time it takes for consumers to come back into the marketplace.

How Franchisors Can Respond to the COVID-19 Pandemic

From an economic standpoint, like the 2008 Economic Crisis, economically this challenge will pass. But, what steps should franchisors be taking now to weather this storm and build for a better tomorrow. Below are some recommendations:

  1. Remember that this will pass, so stay focused on Q4 and your 2, 3, and 5 year growth plans.
  2. Focus on being a good franchisor – it’s times like these that are the reason why many individuals choose to become a franchisee and join your franchise system.
  3. Coordinate with your legal team, make sure that your COVID-19 policies and responses to franchisee inquiries are consistent with your franchise agreements and FDD.
  4. Maintain active and open communication with your franchisees and Franchise Advisory Council.
  5. Understand that a shake-out is happening and your system will be judged by the actions that you take now.
  6. Coordinate with your legal team to: (a) Evaluate the force majeure provisions contained in your franchise agreement and evaluate the potential application to the current crisis – such as whether or not your force majeure provision permits franchisees to terminate their franchise agreements or claim royalty deferrals; (b) Evaluate emergency updates to your operations manual to permit modified franchisee operations and potential alternative approved suppliers and sources of supply; (c) Make sure that your Coronavirus COVID-19 policies and responses to franchisee inquiries are consistent with your franchise agreements and FDD; (d) Closely monitor your supply chain and plan for supply disruptions and cancellations; and (e) Depending on your industry, evaluate your response to the potentially inevitable franchisee requests to suspend or defer royalties.
  7. Implement and communicate enhanced franchise procedures to maintain customer safety.
  8. Closely monitor franchisee metrics, including sales, and costs of goods sold. These metrics will provide important indicators and, when we exit this crisis, will be important data to isolate and evaluate for future Item 19 financial performance representations.
  9. Stay focused on your brand story and what you are doing to help your franchisees.
  10. Set the panic aside, focus on the future of your franchise system, the well-being of your franchisees and customers.

Focus on the long-term. The interdependent relationship that makes the franchisor-franchisee relationship so valuable is the exact feature and characteristic that now makes it vulnerable to this crisis. Now is the time to rally around your franchisees and emerge from this tragedy better and stronger. Focus on what your franchise system will look like in 2020 Q4 and 2021.

Most important, stay safe! See updates and webinar info below:

UPDATES: In an effort to keep the franchise community updated as we all work to solutions to navigate this pandemic, we will be continuously updating this post.

Legislative Updates on Coronavirus and Franchising:

State FDD Registration, Renewal and Registration Extensions Due to Coronavirus:

In response to the Coronavirus pandemic the following Franchise Registration States made the following extensions / accommodations for franchisors filing and renewing their FDD registrations (Updated March 30, 2020):

(a) California Franchise Registration –  In response to the Coronavirus State of Emergency, the California State FDD Registration and Renewal Requirements have been modified so that:

  1. Modified Submission Procedures: Registration and renewal applications that are submitted electronically may utilize docusign signatures in lieu of print physical signatures.
  2. Extension of FDD Registrations: To date there are no extensions.

(b) Maryland Franchise Registration –  By Order dated March 17, 2020 and in response to the Coronavirus State of Emergency, the Maryland State FDD Registration and Renewal Requirements have been modified so that:

  1. Modified Submission Procedures: applications are no longer required to be submitted with paper copies of the FDD. Registration and renewal applications must now be submitted on CD-ROM without a paper copy of the FDD. The CD-ROM should be accompanied by a printed cover letter or application page and a physical registration/renewal check; and
  2. Extension of Maryland Registration Effectiveness and Franchise Sale Offers – For franchisor’s whose Maryland state registration expires on or after March 5, 2020, the Order grants an extension of the registration effectiveness for a period of time equal to up to 30 days after the State of Maryland declares and end to the Coronavirus State of Emergency. As to 2020 FDD’s the State of Maryland is permitting franchisors to “offer” franchises in the State using a FDD that has not yet been registered with the state. It is important to note that this authorization applies to “offers to sell” but not the actual sale, i.e., you can discuss franchise sales but not enter into any franchise agreements.

(c) New York Franchise Registration – By memorandum guidance issued on March 24, 2020 by the Investor Protection Bureau of the New York Office of the Attorney General, the New York State FDD Registration and Renewal Requirements have been modified so that:

  1. Modified Submission Procedures (additional email submission now required): in addition to applications that are filed with paper copies and on CD, Franchisors are now also required to file their submissions by email with the Department of Law. This is an additional obligation that is now imposed in addition to the preexisting mailing requirement. The supplemental email submission must: (i) include the entire registration / renewal application, (ii) include a copy of the front and back of the check to be mailed to the Department of Law, and (iii) include a signed statement by the applicant (electronic or by hand) stating in substance “I will cause this filing and payment to be mailed to the Department of Law forthwith.”
  2. Extension of New York Registration – Franchisors whose registration is set to expire during the relief period of between March 1, 2020 and April 30, 2020 are granted an automatic 90 day extension.

(d) Virginia Franchise Registration –  By and in response to the Coronavirus State of Emergency, the Virginia State FDD Registration and Renewal Requirements have been modified so that:

  1. Modified Submission Procedures: applications are no longer required to be submitted with paper copies. Registration and renewal applications and the accompanying FDD may be submitted on CD-ROM or USB without a paper copy of the Form A application and a physical registration/renewal check; and
  2. Extension of Virginia State FDD Registrations by Judicial Emergency Declaration the Supreme Court of Virginia has extended the FDD registration and exemption dates by 21 days.

Helpful Links on Coronavirus and Franchising:

News on Coronavirus and Franchising:

Webinars on Coronavirus and Franchising and the Franchise Growth Mastermind Facebook Community:

Join and participate in our upcoming webinars: What Coronavirus will Mean for Franchise Brands. The focus of the webinars is to create an open forum and to advance a dialogue for franchisors and franchise leaders to get advice and share solutions as a community. Also, join our private Franchise Growth Mastermind Facebook Community for continued conversations and solutions.

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