Franchise Bankruptcy Attorney in Southern California
Franchises promise a safer bet than starting a business from scratch. They offer name recognition, an established customer base, and existing business relationships, among other things. But running any small business comes with significant risks, and many find themselves unable to meet their financial obligations after a period of time. When a business is struggling to continue, bankruptcy can be the best option. However, when a business is a franchise, extra complications come into play.
At Rounds & Sutter, we have a deep understanding of the intersection between bankruptcy law and franchise relationships. We can help you navigate your options, understand your rights and responsibilities concerning the franchise, and find the best solution for your financial struggles. If you operate a franchise in Southern California and you are considering bankruptcy, the seasoned and experienced Ventura bankruptcy attorneys at Rounds & Sutter are here to offer you considered counsel, legal representation, and peace of mind.
Franchise Bankruptcy Options
Companies in dire financial straits generally have two main options for bankruptcy: Chapter 7 and Chapter 11. The proper bankruptcy to file depends upon the financial circumstances of the enterprise as well as the expectations and desires of the filer.
For businesses that can no longer make a go of it, Chapter 7 bankruptcy offers an orderly method of winding down operations that puts the business owners in the best position going forward. Chapter 7 keeps creditors from calling or harassing the business owner or pursuing lawsuits and establishes a process to pay creditors in priority order through the sale of business assets. Chapter 7 helps ensure that employees get paid and taxes get paid before other creditors come knocking for their share.
Chapter 11 or “reorganization” bankruptcy involves restructuring the business and the debts in order to establish a plan for repayment of outstanding debt over time. Chapter 11 may involve reorganizing or restructuring the company to make it more efficient and profitable, while giving the debtor extra time to pay off debt. Chapter 11 debtors remain in control of their assets, and they continue to operate the business as a going concern. Chapter 11 is appropriate when the business has the potential to become profitable in the future, given extra time to restructure and pay off debts with less immediate pressure from creditors.
Issues Arising in Franchise Bankruptcies
A number of issues arise when a franchisee is approaching bankruptcy that are not common to other business bankruptcies. The franchisee must navigate not only their financial situation but also their contractual obligations under the franchise agreement. Issues of real estate ownership, duties and default under the franchise agreement, and business management may arise which can complicate the bankruptcy proceeding or give rise to unexpected liabilities.
In a Chapter 11 bankruptcy, for example, the bankruptcy court must agree to let the debtor “assume,” meaning continue, the franchise agreement despite the bankruptcy. Bankruptcy courts treat active franchise agreements as a form of executory contracts, meaning both parties are still bound by their obligations under the contract. To assume the contract, the franchisee must demonstrate to the court that doing so is sound business judgment, based on the best interests of all parties involved.
Franchisees going through bankruptcy must also deal with default on the franchise agreement. There may be non-monetary defaults on contractual obligations; for example, if the business closes temporarily while restructuring when the contract calls for continuous operation. The franchisor may then either ask the franchisee to pay to settle the default before assuming the contract or terminate the contract, or require the franchisee to fix the default as soon thereafter as possible.
These are just a few of the concerns that any franchise owner must consider when facing bankruptcy. Our seasoned and savvy Ventura bankruptcy attorneys can ensure that you are fully apprised of all of your options, rights, and obligations, and put you in the best position to ensure your financial future.
Trusted Advice and Representation from Ventura Business and Bankruptcy Attorneys
At Rounds & Sutter, we work for California small businesses every day, guiding them through real estate deals and other business law transactions, and litigating matters ranging from breach of contract to unlawful trade practices. Whether you started your business from scratch or purchased an existing franchise, we understand the difficulties that small businesses face. If you are having difficulty meeting your organization’s financial obligations, contact Rounds & Sutter to explore franchise bankruptcy and other options open to you.