Buying a franchise is a great way to start a business in Texas, yet entrepreneurs need a considerable amount of money to begin operations. Some franchisees may not make it and will eventually need to file bankruptcy. However, what will happen to your franchise agreement if you must file. Will you keep your business?
The type of bankruptcy filing will affect ownership
When an owner files for business bankruptcy, all business assets, including the franchise agreement, become part of the bankruptcy estate. The franchisor cannot take back your franchise while bankruptcy proceedings are underway. Whether you will retain your franchise depends on what type of filing you choose.
Chapter 7 bankruptcy involves complete liquidation. A court-appointed trustee disposes of business assets to settle franchise debts and equally pays all creditors. You will lose your business when you choose this option, but all debts will be wiped out.
If you’re not ready to give up on your franchise, Chapter 11 may provide a better route. This filing type allows you to reorganize your business while wiping out a portion of your business debt. The court treats your franchise agreement as an executory contract, where both parties have obligations that you need to fulfill. You may be able to keep your franchise if the judge in charge of the case agrees.
How can I retain my franchise business?
Franchisees trying to save their business may want to explore non-bankruptcy solutions if they have problematic debt. Among the scenarios you can attempt are:
- Restructuring and loan modifications
- Voluntary asset liquidation that takes place outside of court
- Other types of business litigation
If you decide to go ahead with Chapter 11 bankruptcy, you must prove to the judge that you have sound business judgment based best interest of the debtors, the creditors and the bankruptcy estate. The franchisor’s opinion is not a factor. Non-monetary defaults can complicate your desire to continue operation. If you have non-monetary defaults, the court may require you to settle them with the franchisor before determining that you can continue to run your business as a franchisee.