By: Nathan Baney, Partner at Plave Koch PLC
Franchisee bankruptcies are up sharply in 2026, and most franchisors lose leverage in those cases long before the petition is ever filed. The decisions that determine whether a franchisor can protect the brand, recover what it is owed, and influence who ends up operating the unit are made months earlier, in how concessions are documented, whether security interests are perfected, and how franchise agreements are drafted to survive Chapter 11 treatment.
Franchisors should first determine whether the financial instability is system-wide or isolated to a single franchisee. This dictates whether the response is system-level or unit-level. Taking proactive steps early puts franchisors in a stronger position to manage risks, protect brand standards and maintain stability when individual franchisees enter financial distress.
Early action is crucial. Unfortunately, many franchisees will not seek help until bankruptcy filing is imminent. Monitoring franchise performance and addressing issues at the first signs of trouble will yield more options, including restructuring arrangements, forbearance agreements, facilitating a transfer of the franchise, or planning an orderly exit.
Legal, financial and operations teams should coordinate to develop consistent, well-documented decisions. Clear communication with franchisees about expectations and available support can help reduce confusion and avoid misunderstandings.
When facing a financial crisis, many franchisees will seek concessions, including deferred royalties, reduced fees or modified performance standards. Although these requests may be reasonable under the circumstances, they should never be agreed to informally. If exceptions to franchise agreements are made without establishing a clear framework, a Chapter 11 debtor can argue that course of dealing modified the franchise agreement, or a trustee can use the pattern to attack a pre-petition termination as pretextual. Consulting legal counsel will ensure the terms of any concessions are clearly documented.
Written agreements should clearly state that any concessions granted are temporary and do not create a broader precedent. Poorly documented concessions may be used in a bankruptcy case to argue that contractual obligations are flexible. They may also set system-wide expectations, empowering other franchisees to request similar terms.
Franchisors that wish to obtain a security interest should confirm that Uniform Commercial Code (UCC) filings are properly made, kept current, and that the collateral descriptions actually cover what the franchisee owns. Even if a franchise agreement states that the franchisor has a security interest in the franchisee’s assets, a properly drafted and filed UCC-1 is needed (and must be maintained) in order for the security interest to be effective. A defective or unperfected interest leaves the franchisor unsecured and at the back of the line. (Of course, many franchisors decide not to pursue security interests because they invariably find that they are behind secured lenders, whose role is necessary and who require that they take a senior security interest to protect their investment in the franchisee’s equipment.) Secured status becomes especially important if a franchisee in bankruptcy wants to sell its equipment or the entire business out of the bankruptcy estate. When properly secured, a franchisor may be able to credit bid for the franchisee’s assets. This means the franchisor can use the amount of its existing secured claim to bid on and potentially acquire the franchisee or its equipment without bringing new cash into the transaction. The ability to credit bid can present a significant strategic advantage and make an acquisition more attainable.
Franchisors should also review franchise agreements closely, especially noting default provisions, termination rights and post-termination obligations. If a franchisee files for bankruptcy protection, franchisors should engage legal counsel, file claims and closely monitor the case. If the franchise agreement will be assigned to a new operator, the franchisor must evaluate the proposed new operator and be prepared to object if they do not meet system standards.
Protecting intellectual property remains a high priority throughout bankruptcy proceedings. Franchise systems depend on trademarks, operating standards and proprietary methods and franchisors must ensure these assets are not compromised by enforcing post-termination obligations and limiting unauthorized use. Section 365 treatment of the franchise agreement deserves particular attention: a debtor-franchisee may attempt to assume and assign the franchise agreement over the franchisor’s objection, and the standards governing what constitutes adequate assurance of future performance often determine whether the franchisor retains any meaningful control over who operates the unit post-bankruptcy.
The rise in franchisee bankruptcies presents real challenges to franchisors. However, by keeping UCC filings current, documenting concessions, securing collateral positions where possible and involving experienced franchise legal counsel at each stage, franchisors can protect both the brand and the long-term health of the franchise system. Plave Koch represents franchisors in distressed-franchisee situations on both the pre-petition and bankruptcy sides, including UCC portfolio audits, pre-distress playbook reviews, 365 strategy, and contested cure and assignment proceedings.