Franchise System Responses to the Coronavirus

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From system operations and regulations to employee health and wellness — what you should know about COVID-19. 

By Michael Sturm, Lathrop GPM LLP

In recent days, the devastating effects of the spread of the Coronavirus (COVID-19) on the global economy have become indisputable. Most recently, the Centers for Disease Control and Prevention has advised against gatherings of 10 or more people, the stock market has plummeted notwithstanding unprecedented intervention by the Federal Reserve, and many restaurants, bars and entertainment businesses throughout the country are either closing voluntarily or being ordered to close by state or local authorities. As advised by medical professionals, all businesses are now being urged to take every available precaution to help “flatten the curve” to slow the transmission of the virus, particularly to vulnerable citizens whose health is most at risk.

As a result of this crisis, businesses nationwide that were thriving and planning for expansion only weeks ago may now be threatened with closure due to government direction or collapsing revenues. Supply chains are likely to be affected. No one knows how long the disruption will last and how much more severe it may become — contingency planning is therefore subject to massive uncertainty. These challenges require decisive leadership. But as industry veterans know, execution of an emergency plan within a franchise system often is even more difficult than it is for other businesses because it requires buy-in from franchisees, who can be widely dispersed and affected differently by events.

In order to limit the damage caused by the Coronavirus crisis, franchise systems may wish to consider the following:

General Principles

The health and safety of employees and customers should be the first concern of every franchisor and franchisee. With that in mind, the franchisor should direct any inquiry from employees or franchisees regarding the Coronavirus to the World Health Organization, the Centers for Disease Control and Prevention, and local health authorities.

To the extent that franchised stores remain open, franchisees should be required to maintain cleaning protocols using products effective against viruses and surface contamination. Post information regarding the importance of frequent handwashing and hand sanitizers. As soon as operational personnel are able to visit franchised locations, ensure that required sanitation protocols are being followed to the letter.

Government Affairs/Relations

Monitor federal, state, and local government directives to assure compliance. Guidance and local orders have been changing on virtually a daily basis since the inception of the crisis.

Follow national, state, and local legislative developments regarding any relief or economic stimulus programs that might become available to assist distressed businesses. At present, various proposals are being considered, some of which might provide significant relief to affected businesses, but the scope and timing of implementation are still unclear. The International Franchise Association will be working actively on these issues over the coming months. 

System Relations and Communications

Senior franchisor leadership should instill the trust and confidence that can minimize the harm to the brand and allow recovery to begin as promptly as possible. To the extent possible, given the inherent uncertainty, communicate a realistic plan for damage minimization and recovery.

Establish communication channels to ensure that the most critical information can be communicated quickly and authoritatively to the franchise community. At the same time, ensure that communications from franchisees are received and responded to promptly. Open communications are always important to the health of a franchise system; they are critical in times of economic crisis.

System Adaptation

Consider whether some revenues can be salvaged through adaptation of the franchised business, for example through an increased focus on takeout and delivery or remote delivery of services. If the situation persists, systems may wish to consider strategies for meeting the needs of and/or marketing to financially distressed consumers.

Consider suspension or extension of development and store opening deadlines, to the extent that they are materially affected by ongoing events. Consider the application of force majeure and related provisions in all contracts.

Consider temporary suspension of specific “brand standard” obligations under the franchise agreement. These could include provisions relating to required operating hours, minimum staffing requirements, minimum fees, required menu, product, or service offerings, “abandonment” time frames, etc. Similarly, evaluate potential temporary suspension of approved supplier restrictions if it appears that shortages are likely to develop. Where feasible, locate alternative suppliers or allow franchisees to source goods or services from available resources until normal supply lines are restored.

Evaluate whether any new product testing or rollouts make sense in the current environment. The sudden economic contraction will make meaningful comparisons with prior periods difficult, at best.

Consider how the franchisor will respond to virtually inevitable requests for royalty abatement or deferral.

If a franchisor or a franchisee is required to suspend operations because of a mandatory shutdown, investigate whether the affected party can file claims under the business interruption provisions of its insurance policy. Closely review exclusions in the policy. The timely submission of claims can be critical, so consider consulting with insurance recovery counsel who has expertise in negotiating such claims with insurers.

Through the duration of this crisis, the health and wellness of employees and customers must be paramount. Communicating openly with franchisees about these issues demonstrates that the franchisor is aware and taking proactive steps to work with its franchisees and employees to minimize and limit the effects of this outbreak and promote recovery.

Stay informed with CDC regulations and best business practices during the COVID-19 coronavirus here.

Michael Sturm is a Franchise Litigator based in the Washington, D.C., office of Lathrop GPM LLP. He is also serving on Lathrop GPM’s COVID-19 client response team. Find out more about Lathrop GPM at franchise.org/suppliers/lathrop-gpm-llp.