Garner, Ginsburg & Johnsen, P.A. Law Offices

Franchisee Due Diligence During COVID-19

The COVID-19 pandemic will have a lasting impact on many facets of society, including franchisees of companies both large and small. Even after restrictions are lifted and a vaccine is distributed, prospective franchisees should incorporate COVID-19 and emergency-related due diligence questions about the franchisor’s reaction to the pandemic. Prospective franchisees may find that the actions the franchisor took or did not take during the COVID-19 pandemic will shed valuable light on how the franchisor supports its franchisees and allow them to gauge how prepared the franchisor is to respond to unforeseen circumstances in the future. Asking essential questions during the franchisee’s due diligence process can also prepare a franchise for other shutdowns or obstacles that could potentially arise.

Frustration of Purpose & the COVID-19 Pandemic

In many states, non-essential businesses remain closed as the COVID-19 pandemic persists, making it difficult for franchisees to meet the expectations agreed upon within their franchisor’s contract. Depending on the contract, franchisors and franchisees may have come to an agreement that addresses these unforeseen circumstances, such as a force majeure event clause. These kinds of agreements can assist franchisees in paying rent, reduce said expectations and relieve pressure off the franchisee until the issue is resolved.

What Qualifies Under the Frustration of Purpose Clause?

If your franchisor’s contract does not touch on issues like natural disasters or unavoidable disasters, or you are unable to meet your contractual obligations at this time, the frustration of purpose doctrine may be relevant for your franchise. In the event of business closures and canceled events, the frustration for purpose clause can discharge the duties to pay under these circumstances:

• The frustration relates to both of the principal purposes of the parties represented in the said contract (franchisor and franchisee).
• The frustration is substantial, not simply obstructing the business from being profitable.
• The idleness of the frustration event is a basic assumption on which the contract is based.

In conclusion, the frustration of purpose clause is not defendable if the frustration could have been controlled by the promisor, potentially making it relevant to franchisees in the COVID-19 pandemic if the parties had not assessed the potential of the intervening frustration and weighed the risk accordingly when the contract was signed.

Questions Franchisees Should Be Asking Regarding Franchisor’s COVID-19 Response

Before committing to any franchise, it is important to keep in mind what is covered in the contract so you don’t miss out on the qualifications of certain clauses when an unprecedented event occurs. For some current franchisees, these early negotiations have saved them during the extraordinary circumstances the COVID-19 pandemic has created for the industry.

For prospective franchisees, one of the best sources of information on the franchisor’s response to the COVID-19 pandemic is existing franchisees. The following list of COVID-specific franchise due diligence questions can be used as a template to assist prospective franchisees when calling franchisees that are currently in business. Prospective franchisees should also refer to this helpful list of non-COVID-19 specific due diligence questions.

• How quickly did the franchisor provide guidance to the system on shutting down?
• Did the franchisor waive fees or provide franchisees with economic relief during the shutdown? Did the franchisor simply defer fees? Did they refuse to provide any help on fees at all?
• What assistance did the franchisor provide with reopening plans or reopening marketing and public relations?
• Did the franchisor provide franchisees with reliable information during the pandemic? Did it provide you with resources to help secure loans, comply with CDC guidelines, or support your employees?
• Was the franchisor easy to access and were your questions and concerns quickly addressed during the pandemic?
• Did the franchisor take any action to address franchisees that were not following federal, state, or local laws and guidelines?
• Did the franchisor implement any new programs or technologies to help your business comply with social distancing requirements or otherwise better serve customers during the pandemic, like allowing delivery services or online tutoring services?
• Do you feel the franchisor was able to adapt to the rapidly changing circumstances and provide you with appropriate support?
• Did you feel that the franchisor valued your, your employee’s, and your customer’s safety?

This list is not exhaustive, and there may be many more questions you should ask existing franchisees during your due diligence process. This list, however, is intended to provide a jumping off point, and will hopefully help you elicit some helpful information from franchisees and allow you to make a better-informed investment decision.

Be Prepared for the Unexpected

The franchise industry is always changing, especially during these unprecedented times. In order to know if a franchisor is taking the appropriate steps, make sure you’re following through with the due diligence process before proceeding and signing a contract. These due diligence questions are great to ask experienced franchisees who have been active through the COVID-19 pandemic before you invest and things start to shift for the worst.

This time is extremely difficult for small businesses and franchisees. We are here to help. To learn more about relief for franchisees during the COVID-19 pandemic, explore our blog and resources. Our franchise lawyers have been helping franchisees back their business for decades. Contact Garner, Ginsburg & Johnsen today to stop terminations, uncover fraud, prevent encroaching, negotiate COVID-19 agreements and more.