Impact of Covid-19 on Franchising in the USA

International franchising has been considered by many companies to diversify their risks and opportunities. Different countries have different laws regulating franchising. Some countries like Australia, Malaysia, and the USA have special laws to regulate franchising and some other franchising countries have freedom of law.

In an exclusive interaction with Franchise India, Carl Zwisler, Senior Counsel, Lathrop GPM LLP, USA, shares his insights learned from the clients and the franchisors from around the world. 

Covid-19 and its Effect on Franchising

The impact of the pandemic has been affecting many businesses. Many of the franchising systems might not survive and those who do survive might not have been severely affected. Those surviving would be able to keep their businesses open and continue to be in business with the required cash flow. Businesses like food delivery, home health care, online education are witnessing growth. Other systems that took advantage of the opportunity which were not thought to be important earlier are also going to survive.

Franchising is unique as it is based on sharing know-how and experience. Best franchisors are those that take advantage of their own experience as well as the franchisees' experience as they confront challenges. 

The major challenge or opportunity that one might see through the pandemic is the difference in regulations in different areas, especially at the local level. The national or global franchisors cannot impose their standards at the local level where they are facing pandemic challenges.

Understanding the Franchisor and Franchisee Issues Amidst Covid

The pandemic has forced to shut down businesses apart from essentials. The businesses that are open have concerns over the protection of customers and employees, what if an employee or customer is infected, how many customers are allowed to enter the store, etc. On the other hand, if the business doesn’t open does the franchisee have to pay the minimum royalty fee?

In the US and Australia, joint employer liability is in force for a couple of years. This means that the franchisor provides direction over employment practices to the franchisee. Under the covid situation, is the franchisee liable for these practices?

One thing that has to be noticed is the presence of the Forced Measure Clause in the contract. Forced Measure Clause is a legal concept wherein if there is an act of God or something beyond the anticipation and control of the parties then the performance of the contractual obligation is suspended for the duration of the forced measure. The thing that has to be noticed is that in common law countries, if this clause is not present in the contract, then it might not be applicable.

Royalties have been relaxed or even waived off during the pandemic. But, it differs on a case-to-case basis depending on whether the franchisees are making profits or not.

Measures Taken by the US government Towards Businesses

The USA has brought economic aids to businesses and employees. Loans are given to small businesses with a waiver of a certain percentage for a certain period if the business is using it to pay its employees. Banks verify whether the businesses are qualifying for the program.

What is needed is communication and negotiation on a localized basis because each situation is different. Franchisors don’t wish to cut off with the area developers because they get profit for their business. They won’t cut these franchisees because they can’t develop in the pandemic. Simply put, they do not want to break with franchisees who cannot pay royalties or cannot operate fully. Franchisors need royalty to provide services to the franchisee and generate business. For any royalty relief, the problem has to be demonstrated. Where there is no forced measure clause in the contract, an understanding of different franchisees under different situations is needed to deal with them accordingly.

During the first few closures, the franchisor and franchisees were unaware of how to deal with it. The franchisor Advisory Council and groups of franchisee communities tried to develop methods of responding to such situations.

Franchise Regulatory

Zwisler believes that freedom of law makes franchising easier. A regulatory is not vital unless there is a serious problem unless there are people defrauded or there is evidence that fraud has happened. There is no particular difference from the legal perspective of how franchising deals with Covid. Regulations have changed in Indonesia, Thailand, South Korea, Malaysia, but it is not Covid related.

International Franchising in the USA

A survey of US companies by the International Franchise Association revealed that 30% of their companies are already franchising internationally whereas, 70% were wanting to diversify even before the anticipated pandemic. Although, there are few challenges to diversify because of the pandemic. One of them is the travel restrictions affecting supply as well and the other challenge being in-person training.

The Business Categories Emerging in Pandemic

The business models that are seen sustainability during this pandemic are home health care, online learning and education, dark kitchens, delivery concepts, and janitorial businesses.

Edited By: Vaishnavi Gupta