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:
- reporting declining sales;
- inquiring about policies for closures;
- inquiring about modified cleaning and hygiene policies;
- inquiring about policies for employee paid leave and sick days;
- inquiring about disruptions to supply chains;
- inquiring about cash flow solutions; and
- inquiring about discontinuing or deferring royalty payments.
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:
- Remember that this will pass, so stay focused on Q4 and your 2, 3, and 5 year growth plans.
- 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.
- 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.
- Maintain active and open communication with your franchisees and Franchise Advisory Council.
- Understand that a shake-out is happening and your system will be judged by the actions that you take now.
- 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.
- Implement and communicate enhanced franchise procedures to maintain customer safety.
- 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.
- Stay focused on your brand story and what you are doing to help your franchisees.
- 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 and Regulatory Updates on Coronavirus and Franchising
- Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 - (Updated March 21, 2020) On March 6, 2020 President Trump signed into law the Coronavirus Preparedness and Response Supplemental Appropriations Act ("CPRSAA") . The Act provides $8.3 billion in emergency funding to government agencies, including the Small Business Administration ("SBA"). For the franchise community - franchisors, franchisee's and all small businesses - the significance of this act is the supplemental funding that it provides to the SBA will be used by the SBA to provide Disaster Assistance Loans to Businesses Impacted by Coronavirus. For qualifying businesses these loans will charges an interest rate of 3.75%/ Depending on the location of your business, your state Governor must make a disaster relief declaration with the SBA. The following link is to the SBA Disaster Assistance in Response to Coronavirus page. Franchise Industry Perspective: In the past week State governors have been filing the appropriate declarations to allow businesses to start accessing these loans. While this assistance is a good start much more is needed - as the government bails out big banks and Wall Street much more is needed for Main Street!!
- Families First Coronavirus Response Act - (Updated March 21, 2020) On Saturday March 14, 2020 The US House of Representatives passed the Families First Coronavirus Response Act. This legislation was signed into law by President Trump on March 18, 2020. This law requires small employers - small businesses with less than 500 employees - to provide emergency paid sick leave and family leave for employees impacted by COVID-19. Franchise Industry Perspective: This legislation sounds great in practice and has a great name ("Families First...") but, in practice, has imposed additional burdens and obligations on small businesses (including franchisors and franchisees) across America! As small business owners fight to keep their doors open they are now left with uncertainty as to how they will implement and comply with this new law and how they will afford the additional expenses that this law now imposes on them. This law which exempts big business is counterproductive and a politically driven mistake.
- Phase 3 Bill: CARES Act - (Updated March 27, 2020) The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, the third phase of Coronavirus legislation now pending before congress. This legislation provides over 2 Trillion dollars of resources and relief that includes checks to individuals, increased unemployment benefits, and funding for public health, local governments, large corporations and small businesses. From a franchise and small business perspective the CARES act provides $377 Billion of funding for emergency business grants of up to $10,000, and forgivable business loans used for maintaining employee payroll, rent, mortgage and loan. This legislation is not yet passed.
- FASB Issues One Year Delay of Revenue Recognition ASC Rule 606 - (Updated April 8, 2020) The Financial Accounting Standards Board (FASB) has issued a statement suspending implementation of ASC Rule 606 for private franchisors. ASC Rule 606 is a revenue recognition rule that requires franchisors to defer recognition of revenue from initial franchise fees. This revenue recognition rule has negatively impacted franchisor financial statements by requiring a delay in the recognition of income from initial franchise fees. For private franchisors the FASB has delayed implementation of this rule for one year.
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:
- Modified Submission Procedures: Registration and renewal applications that are submitted electronically may utilize DocuSign signatures in lieu of print physical signatures.
- 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:
- 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
- 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:
- 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."
- 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:
- 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
- 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.
News on COVID-19 and Franchising:
- Subway Franchisees Seeking Relief Amid Coronavirus Pandemic
(March 16, 2020) New York Post article about Subway franchisees requesting relief from the corporate Subway franchisor. Franchisees are requesting relief from weekly royalty and advertising fund fees. In the wake of mandatory closures and the withdrawal of consumers into isolation, the franchisors need to evaluate the abatement of royalty obligations.
- McDonalds Closing Dining Rooms
(March 16, 2020) CNBC article about McDonalds closing corporate location dining rooms across the country and advising franchisees to do same. In many cities and counties across the country dining room closures are already mandatory and we expect within the next week for dining rooms to be closed nationwide.
- IFA $300 Billion for Franchise Industry
(March 19, 2020) The International Franchise Association petitioned the federal government for $300 billion in funds to provide liquidity to the franchise industry. We expect and hope that this relief request will be addressed in the Phase 3 Coronavirus Bill currently under negotiation.
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