When Franchises Go Bad Bankruptcy Might Be the Solution
Sept. 4, 2025
Many people see buying a franchise as a ready-made business opportunity with a proven track record of success and built-in customers. But the reality is that not all franchise opportunities are equal. While franchises can provide opportunities, they are not fail-proof or risk-free, no matter how well-established the brand. Franchises can sometimes become financial traps for both the business and its owners, since owners often personally guarantee franchise agreements, loans for start up, and commercial leases. When a franchise deal goes wrong, it’s crucial to understand that in some cases, bankruptcy is a viable and affordable option that may provide significant relief.
The Allure Of Franchises
The sales pitch for a franchise relies on optimism and, in some cases, shrewd salespeople who over-promise positive results and downplay the risks and failure rates. Sales tactics include the promise of quick profitability and an emphasis on brand name recognition, as well as highlighting past successes.
We have worked with many franchise operators who have told us they were led to believe that it would be easy to buy a franchise, and that it would be a self-managed business that wouldn’t interfere with their successful careers. Many thought that the franchisor would provide marketing and support for dealing with any business challenges that arose. That didn’t always happen.
Hidden Pitfalls And Financial Risks
To begin with, many franchises have high initial costs, including franchise fees, equipment, training, and build-out expenses. Ongoing costs include royalty and marketing fees, which are typically based on your franchise’s gross income, not profitability. Additionally, some of the franchisor’s requirements may make it harder for you to adapt to market conditions in your location, such as the market becoming saturated with similar businesses.
Another pitfall is that some franchises are popular for a hot minute, and then the whole franchise goes down because of changes in the market. Not every franchise is the next McDonald’s. Some are the next Blockbuster, which went down in flames as streaming services stormed the market. People who got into the Blockbuster franchise late in the company’s span of operation lost significant amounts of their investment.
The Devil Is In The Details
We have worked with franchisees who didn’t really understand the terms of the Franchise Disclosure Document. In their excitement about purchasing a franchise, they often overlooked the technical details that may have obscured the risk and overhyped the possibility of success. Franchisees are often first-time business owners, but franchisors are experts at selling their product. Many first-time franchise buyers underestimate the challenges, hidden costs, and complexities of buying and operating a franchise.
Some other details in a franchise contract that may have come back to bite you include:
Non-compete agreements: These kinds of agreements limit your ability to make a living in the same industry, even if your franchise business closes. Not only do you lose your investment, but you can also lose your ability to provide similar services altogether or within a geographical radius of the original location.
Contracts that favor franchisors: That’s probably pretty much any franchise contract. The franchisor holds the power, and the contract is legally binding. You may not have much flexibility in deciding what products to use or purchase, and how to run your business, sell it, or terminate the contract.
Personal guarantees: If you have provided a personal guarantee for a franchise loan, you may be putting your home, retirement savings, and other financial assets at risk. In other words, if the franchise fails, you may not only lose your initial investment, but you may also be forced to pay any money owed and lose assets.
If Your Franchise Business Is Not Sustainable, Bankruptcy May Help
Bankruptcy provides a legal safety net when your franchise business is failing to meet all its obligations. If your debt, royalty payments, and other franchise fees are spiraling out of control, and you don’t have enough revenue to offset the costs, the sooner you act to address the issues, the better.
When you have done everything within your control and your business is still not profitable and your debt is mounting, bankruptcy can protect your financial future and help you achieve a fresh start. Depending on whether you want to restructure the business or protect your personal assets, we can help you navigate this process and ensure you have the best chance for a successful restart.
Bankruptcy provides multiple benefits, including:
An automatic stay that stops all collection efforts, lawsuits, evictions, and foreclosures, and prohibits garnishment of wages, income, and bank accounts. This can give you some much-needed breathing space.
Potential discharge of certain types of debts for the business in Chapter 11, Subchapter V reorganization (“Subchapter V”) and or discharge of personal liability, if you have made a personal guarantee, in an individual Subchapter V, Chapter 7 or Chapter 13.
The handling of assuming or rejecting franchise agreements, commercial leases, supplier contracts, and non-compete agreements in bankruptcy court. These are technical decisions that our experienced team can assist with.
Potential to propose a repayment plan that could restructure loans and free up cash to help the business succeed.
Potential to “cramdown” secured loans to the value of the pledged assets. This can sometimes make the difference in moving the business toward profitability.
Potential to keep employees working.
Bankruptcy Can Be Complicated. We Are Here To Help.
We can help you determine the best course of action for your specific situation, including which type of bankruptcy is most suitable for you. There are different types of bankruptcy, each with its own advantages and disadvantages. We can help you understand these options and choose the best one for your situation, whether your business is still viable and has the potential for profitability, possibly “de-branding” the franchise; or whether shutting down the business in an orderly fashion is best.
If you are a franchise owner and your dream of owning your own business has turned into a financial nightmare, our experienced bankruptcy team at Branson Law, led by Jeff Ainsworth, is here to help you. Although we cannot guarantee the outcome of your case, we will assess your situation and determine whether bankruptcy is in your best interest, and if so, which type.
We have represented numerous franchisees in the past, most often in Subchapter V cases, ranging from restaurant franchises, construction franchises, medical practice franchises and gelato franchises to fitness and yoga studio franchises, among others. Our knowledge and experience can assist you in determining what is best for your franchise business. You are not alone; franchise purchases are on the rise and do not always work out, often due to factors beyond the control of the owners.
Branson Law is here to guide you through the challenging bankruptcy process and help you protect your financial future. By taking proactive steps now, you can ensure you have access to the debt relief you need. Don’t wait until it’s too late—start the process today to secure a more stable financial situation tomorrow. Contact us today to protect your business and its employees, your income, and your future.
We are located in Orlando, Florida, and handle bankruptcy cases throughout the State of Florida. Contact us today if you live in, own property in, or operate a business in Florida and are unable to manage your debt. We can help you understand your options. Our goal is to help you so you can sleep at night.