A recession is coming, if it is not already here. But this won’t be a recession like 2008. Back then, the banks threw you under the bus so that they could survive. Today, they are stronger. More importantly, they know they must partner with you. So your strategy must be different now.
Bottom line? Flexibility and fast responses from both franchisors and franchisees to changing conditions are the keys to surviving. The advice in this post may have a short shelf life because the economic environment, and governmental restrictions and aid, may change abruptly. Nevertheless, franchisors and franchisees working together provides the best chance for success.
Governmental Action
The International Franchise Association is lobbying Congress as it finalizes the CARES Act to recognize both the special role that franchised businesses play in the economy and the unique vulnerabilities of franchised businesses. The priorities of the Act are small business funding, a business interruption insurance component and a possible “Employment Insurance “ provision in order to allow employees furloughed during the crisis to receive Unemployment Insurance but remain tied to their employers for health coverage among other benefits.
Survival requires close monitoring of relief and assistance packages that are under discussion at all levels of government. Just because something essential does not pass on the first legislative initiative does not mean wisdom will be ignored on the second legislative event. Provide support for those who are arguing for your interests before government. Industry leaders have been very vocal in communicating the critical needs of our industry, and the scope of the coming crisis means that new legislation will be announced serially in the near future.
Assist in Seeking Aid
Assist franchisees and employees in applying for available and likely ever changing benefits. For employees you cannot keep, encourage them to apply for unemployment now. You may need them in the future, and you want to show them the love even if you cannot show them the money.
Open Dedicated Lines of Communication
Communication will serve your brand best during this ordeal. Have a designated communications spokesperson and channels solely for COVID-19 issues. Set up phone meetings with your stakeholders, including key customers, suppliers and franchisees. Don’t keep them guessing or speculating. They may even offer constructive advice.
Talk to Your Suppliers, Landlords and Vendors
Reach out to your suppliers, landlords and vendors now. They are nervous and will accept your call because they know it is coming. Just like you, they are looking for information from the front lines and want to take your temperature. They want to understand the liquidity of the business and avoid surprises. They will want predictions and commitments, which are impossible in this environment. Make no commitments but communicate that we all need to work together, and when the fog clears, everyone will be back on track.
Have the Sometimes Difficult Discussion with Your Lender/Funder
Lenders and funders are poised to expect calls about debt relief, so get in line to talk with them. Then, talk to them early and often. Communications with lenders are a bit more formal than those with landlords and vendors so make sure you work with professionals and rehearse before you communicate. We anticipate that there will be a stampede for debt relief, so make sure you are at the front of the line and have positioned yourself as one of their favorites because you engage in direct, transparent conversations about liquidity. The typical deals available will be to go interest only, but if you need more, ask for more. The banks are strong, money is cheap and plentiful, and the legislation is intended to make everyone whole, so now is the time to ask for more if you need it. The federal government is singing a new tune and wants to be a friend to small business, and the banks are listening.
Liquidity Is Key, So Conserve Cash
Put new development, remodeling and re-branding plans, and other expensive projects on hold. Liquidity will be the key to survival and new facilities will mean little if you cannot exploit these expenditures right now. Same with development agreement obligations. These should be suspended, as they will be cash wasters until the business environment improves. Same with utilities and taxes. Likely no shutoffs and no heavy hand enforcement during a crisis. Make sure that you have counsel to navigate the tax issues, because you need to negotiate from a position of safety and not cross the line.
Be Flexible Respecting Royalties and Advertising Fees
Franchise royalties and advertising fees are being deferred or abated by many of the major franchisors. We have heard of total abatement for businesses that have been closed by state and/or local governmental order. For those operating on limited scope, such as takeout or drive-in only, the weekly payment of royalties and advertising have been deferred for as much as 45 days. If you are a franchisor, think in terms of good will and needed liquidity for hard hit franchisees. If you are a franchisee, ask for reasonable adjustments. Franchisors that reasonably accommodate franchisees will lead their franchisees’ other creditors into making necessary accommodations because those creditors will see that the franchisor is sharing the risk and the recognition that something must be done. Such accommodations will create good will and are necessary to maximize the likelihood of success after the COVID-19 war is over.
Check Your Insurance
Some of the proposed legislation has a business interruption component. That is no substitute for business interruption insurance coverage if you currently have it. Go to your broker and run this down. Usually this is a matter of interpretation and can require lawyering. Same with force majeure clauses in franchise agreements, leases and vendor contracts. These are pattern clauses allowing for contract performance to be suspended or cancelled in the case of war and other forces outside of the parties’ control. Particularly for cross-border contracts, these clauses will be the subject of dispute resolution and may ultimately provide the necessary leverage to avoid permanent closures. Contact the lawyers who provide help with these clauses, particularly those with international expertise where most of these clauses are interpreted, even for domestic disputes.
Restructuring Options
Franchisors should be poised to be proactive in franchisee restructuring. Franchisors can assemble a menu of governmental offerings and lead the way in discussions with key creditors. Franchisors can show how they will partner with key creditors, and maybe even subordinate royalties and advertising on a selected basis so as to maintain operations at particular sites. System wide relief should be considered in connection with workout professionals, whether they be lawyers or restructuring advisors.
Franchise companies grow through passion AND compassion for their brands, customer needs and franchisees. Passion and compassion is needed more than ever if operations are to survive and ultimately flourish in this economic environment. Perhaps your company should cocoon for the present so that it can come out strong when the coast is clear; maybe you need to be proactive and demonstrate how to lead the way. Each company will need to choose the best way to survive, maintain and build on brand equity. The companies that position themselves now, and which maintain their passion tempered by compassion, will be the post-war industry leaders.
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