How The COVID-19 Pandemic Affected Franchise Growth

franchise coronavirus

These days you cannot turn on the tv or watch social media without being overwhelmed by the news about the effects of the Covid-19 coronavirus.

And as the volatility of the stock market reflects, this virus is having an impact on both big and small businesses.

But, specifically, what does that mean for a franchisee? In this article, we will be discussing how coronavirus affected franchise growth?

coronavirus franchise closure

Franchise Agreement Provisions

If you are a franchisor and you are concerned about how coronavirus affects franchise growth, it is time to look closely at your Franchise Agreement, which is likely to include important provisions about who carries the risk of this pandemic.

Some of the provisions that you should consider are as follows:

1. Force Majeure Clauses

These clauses can provide franchisees with significant protection for delays in complying with certain deadlines, under the franchise agreement, which are simply impossible to meet due to the coronavirus.

“Force majeure” generally refers to an unforeseeable situation that prevents anybody from fulfilling a contract.

Often these include drought, flooding, earthquake, storm, fire, and sometimes epidemics.

Most franchise agreements have “force majeure” clauses included in them, whether by name or their content, which are the most obvious conditions in the Franchising Agreement that can be caused by the coronavirus.

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You should carefully review any provision of “force majeure,” and look at how force majeure is defined — what it does and does not excuse. Is this epidemic part of its definition of force majeure? Is it arguably included in the agreement?

Moreover, bear in mind that the force majeure provision does not exempt any of the franchisee’s responsibilities under the agreement, even though the coronavirus is theoretically covered.

For instance, while certain delays may be excused (e.g. opening time frames for your location), royalty and marketing fees may not be excused during a pandemic.

Remember that the use of exact words is of true importance in the Franchise Agreement.

2. Royalty Payment/Liquidated Damages

Most franchise agreements allow an ongoing basis for the franchisor to obtain a royalty payment of money (often a percentage of sales).

Many franchise agreements also provide for either a minimum amount of royalty payments per pay period or a provision of liquidated damages to calculate a minimum amount owed to the franchisor in case the business is shut down.

You could still be on the hook for this amount depending on the language of your Franchise Agreement, even though your company has slowed drastically or even temporarily closed.

Again, during a coronavirus pandemic, the “force majeure” clause mentioned above could provide protection against certain provisions.

But what happens if the supplies you need to run your franchise are not available? how coronavirus affected franchise growth in case of no supplies available?

3. Supply Chain Issues

Many franchise agreements make provision for you to use or sell particular goods only.

The franchisor will often tell its franchisees what brand or which supplier they need to use.

What we see with Covid-19 starting in China, is that it has an impact on the supply of certain products.

Again, take your Franchise Agreement and review the “Supplies” or “Products and Services” section.

What happens if the supplies you need to run your franchise are not available? Will the Franchisor bear the cost of assessing a substitute supplier in case the original supplier can not meet the demand?

Who would bear the expense if your franchise is disrupted due to the franchisor’s choice of suppliers?

Will the franchisor be on the hook for loss of royalty payments? Your franchise agreement will probably address some of those issues – if not all of them.

supply chain covid

4. Insurance

Most franchise agreements require that the franchisee should obtain certain amounts of specific insurance coverage. Business interruption insurance is also one of the necessities.

Once again, you must remember that the devil is in the details.

As each insurance firm designs and interprets its policies differently (so you must look directly at your policy), usually, coverage for business interruptions are triggered when there has been physical damage to the property -think earthquakes or hurricanes- and sadly not by a sweeping pandemic.

That being said, if it is determined that your shop has been contaminated and you need to pay for decontamination and sanitation, business interruption insurance can cover the costs.

Now, are you at the beginning of your franchise journey?

5. Establishment of Business

What happens if the novel coronavirus struck just before you even secured property or opened your business at the beginning of your franchise relationship?

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Many franchise agreements place time limits for how long franchisors are expected to choose a venue, sign a contract, and/or have their business opened.

Failure to meet any of these dates will trigger a termination event that allows the Franchisor to terminate the franchise but retain the initial franchise fee.

You must check the Franchise Agreement and decide whether there are right and fair extensions of these dates and whether there are exceptions that justify such a situation.

Franchise System Responses To The Coronavirus

It is often even more difficult to execute an emergency plan within a franchise system than it is for other businesses because it requires buy-in from franchisees, who can be widely dispersed and affected differently by events.

Franchise systems may wish to consider the following in order to limit the damage caused by the Coronavirus crisis:

General Principles

First and foremost, every franchisor and franchisee should be concerned about the health and safety of the employees and customers.

With that in mind, the franchisor should direct any employee or franchisee inquiries regarding Coronavirus to the World Health Organization, the Centers for Disease Control and Prevention, and local health authorities.

Franchisees should be expected to implement cleaning protocols using products that are effective against viruses and surface contamination to the degree that franchised stores remain open.

Write about the value of regular handwashing and hand sanitizers.

Once the operational staff is able to visit franchised sites, ensure that the sanitation protocols needed are being followed.

Government Affairs/Relations

Track the orders of the federal, state, and local governments to ensure compliance. Since the crisis started, instructions and local directives have changed on nearly a daily basis.

Follow national, state, and local legislative developments with regard to any relief or economic stimulus programs that may become available to help distressed businesses.

government affair covid franchise

Various measures are currently being discussed, some of which may bring substantial relief to the impacted businesses, but the extent and timing of implementation are still uncertain.

In the coming months, the International Franchise Association will be actively working on those issues.

System Relations and Communications

Senior franchisor leadership must instill the confidence and trust that can minimize harm to the brand and enable recovery to begin as quickly as possible.

Given the inherent ambiguity, communicate a practical strategy for mitigating and restoring harm to the extent possible.

Establish contact mechanisms to ensure that the most important information is conveyed to the franchise community quickly and authoritatively.

At the same time, ensure that you receive and respond promptly to communications from franchisees.

Open communications are often critical for the health of a franchise system; in times of economic crisis, they are crucial.

System Adaptation

Consider if other revenues can be saved by adaptation of the franchised business, for instance by concentrating more on takeout and delivery or remote delivery of the services.

If the situation continues, businesses might wish to consider strategies to meet the financially distressed consumer and/or marketing needs.

Consider suspension or extension of development and store opening deadlines, to the extent that they are materially affected by the current events.

Think about extending force majeure in all contracts and the relevant provisions.

Consider temporary suspending specific “brand standard” obligations according to the franchise agreement.

These could include provisions relating to the required operating hours, minimum requirements for staffing, minimum fees, required menu, product or service offerings, time frames for “abandonment”, etc.

Similarly, determine possible temporary suspension of permitted supplier restrictions when it is likely that shortages will emerge.

Where possible, identify alternate suppliers or enable franchisees to restore normal supply lines to the source of products or services from available resources.

In the current environment, evaluate whether any new product testing or rollouts make sense.

The sudden economic contraction will, at best, complicate meaningful comparisons with prior periods.

Keep in mind how the franchisor would respond to virtually inevitable requests royalty abatement or deferral.

The Bottom Line

A global outbreak such as the Covid-19 coronavirus scares nearly all, including franchisors who have clear performance responsibilities under their franchise agreement.

Hopefully, the franchise agreement would protect you from the worst financial effects of this epidemic. Nevertheless, even though the franchise agreement does not have all the details you are looking for, do not worry!

The good news is that it is usually in the best interest of both the franchisor and the franchisee to succeed. And in franchise business with a stable franchise network, you definitely are not the only franchisee affected by this crisis.

Therefore, irrespective of the language in the franchise agreement, it would be the responsibility of a practical franchisor to work with you and your other franchisees to implement logical solutions to help you all over this storm.

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