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What You Need To Know About Buying a Franchise In Bankruptcy

Chapter 11 bankruptcies can be an attractive opportunity to grow your franchise business IF you know all the facts and understand the process - and risks.

April 5, 2023

Burger King, Bankruptcy and Franchising

Chapter 11 bankruptcies can be an attractive opportunity to grow your franchise business IF you know all the facts and understand the process – and risks. Meridian Restaurants Unlimited LC, a Burger King franchise with 118 restaurants across nine states, has filed for Chapter 11 bankruptcy protection.

Under a Chapter 11 bankruptcy, the business owner typically has access to financing, allowing them to purchase assets that may have previously been outside their reach. There are, however, risks associated with this type of acquisition; the buyer must have an understanding of the process and all relevant facts before proceeding. Furthermore, it’s important for the buyer to remember that they are assuming responsibility for any debt or obligations inherited from the previous owner. As both a bankruptcy and franchise attorney, I have worked with clients on both sides of the issue.

If you’re considering buying a franchise in bankruptcy, here are some points you and your attorney need to consider.

What You Need To Know If You’re Buying a Franchise in Bankruptcy

  • You must raise your hand and let the debtors’ counsel and any investment bankers that have been hired know that you are interested so that you can receive due diligence package.
  • The due diligence will be a short time period with limited access and information.
  • The assets will be auctioned through a bidding process.
  • Most bankruptcy sales use a “stalking horse” bidder to set the price with a breakup fee paid to the stalking horse bidder if someone bids higher.
  • In bankruptcy court, cash is king. If you can pay cash, and pay cash quickly, you will have an advantage over everyone else who needs to get their financing arranged. You need to have your financing ready to go.
  • Bankruptcy doesn’t change the fact that you will need to be approved by the franchisor for expansion and for this purchase.
  • You need to know that the franchisor is almost always involved behind the scenes and has an opinion about how the assets should be sold, and often has an opinion to whom the assets should be sold.
  • You should know you need to hire a local bankruptcy counsel in order to give yourself the best chance at getting inside information on what’s happening in the case. Bankruptcy attorneys in each area all know each other and tend to have collegial and transactional relationships.

Buying a franchise that is in bankruptcy can be a great opportunity for business owners; however, it is important to proceed with caution. An experienced bankruptcy and franchise attorney should be consulted before taking on such an endeavor. It is important to understand the risks associated with the purchase and have a thorough understanding of all relevant laws and regulations, as well as any debt or obligations inherited from the previous owner. The right attorneys can provide valuable guidance throughout this process, and protect your interests and investment and we are those attorneys.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.