Another disadvantage of finding alternatives without insolvency is the lack of an automatic stay17, which acts as an injunction immediately after a voluntary bankruptcy filing to prevent creditors from making recovery efforts against a struggling franchisee while attempting to reorganize or liquidate its assets. Outside of bankruptcy, there is no universal and automatic protection to prevent a creditor from confiscating a bank account or recovering important personal property, so it is important that creditors who want to work with a financially fragile franchisee understand what is happening with other creditors who could become troublemakers. It should be borne in mind that the risk of involuntary registration can be minimized through good communication and by ensuring that all creditors are invited to participate in the planning process of an alternative independent of the bank. Creditors who involuntarily file for bankruptcy usually do so because they are frustrated by the debtor`s lack of transparency combined with the belief that insiders are dispersing the debtor`s limited assets. Few creditors will be motivated to invest time and money to initiate an involuntary bankruptcy if the franchisee has spoken openly about his financial situation and has involved all creditors in an attempt to resolve their financial problems. If there is a consensus that the business could be profitable, the franchisee must make realistic short- and long-term forecasts of future revenues and expenses and develop a restructuring strategy independent of the bank. To be successful, the franchisee must convince its creditors that future cash flows from operations, as well as any equity injections, refinancing or both, will be sufficient in the future to repay the company`s future expenses and repay a significant portion of its accumulated debt over a reasonable period of time. The franchisor should consider making financial concessions such as royalty reductions, deferrals or waivers to help the franchisee attempt to restructure outside of bankruptcy. This will show that the franchise system supports the distressed entity and helps the franchisee convince its other creditors to work with it outside of Chapter 11. These potential disadvantages of non-insolvency alternatives can generally be minimized by careful drafting of pleadings and other relevant documents used in government insolvency proceedings, open communication between the debtor`s insolvency professionals and the creditor office, and credible assurances that insiders will not loot the debtor`s assets.
ABCs have their origins in English common law, and currently more than thirty states have ABC laws,24 while others, such as Connecticut, have not codified this common law practice. ABCs are initiated voluntarily in accordance with State company law, as well as all applicable ABC Articles, and the assignment must be in accordance with a company`s articles and by-laws, which generally require the approval of the board of directors and shareholders. The assignee often has its own standard escrow contract and requires an advance with the balance of fees and expenses paid from the proceeds of the sale of assets. After the summons, the assignee is generally required to register the assignment in the assignor`s country of residence and to serve on all known creditors a notice of assignment, a notice of the date of freezing of receivables, and information on how to file a claim.25 Some abc laws also require the assignee to deposit security and provide an inventory of the assignor`s assets.26 The franchisor, among all creditors in a unique position to know a franchisee`s financial difficulties from the earliest stages, as the franchisee often has to provide monthly financial reports. The franchisor should identify the franchisee`s financial problems early on and encourage struggling franchisees to seek professional financial support as early as possible when the lure of bankruptcy seems more attractive as an easy way out. The franchisor may also use a standard reorganization agreement, which should include a cross-default provision that also makes a default under the reorganization agreement a default under the franchise agreement. The franchisor may have a model forward promissory note or other forms such as a release, confirmation and healing agreement that it uses system-wide, especially for training sessions where the franchisee can convert some of its current liabilities into long-term debt. While this may seem counterintuitive, the franchisor might even consider exempting the franchisee`s customers from their personal guarantees in exchange for their consent to resell the franchise to the franchisor on favorable terms after a short period of time if a turnaround does not appear to be working. This approach creates a strong deterrent effect for the franchisee`s owners to file for bankruptcy if the training is not successful Sometimes lenders insist that a distressed borrower hire a turnaround professional to try to stabilize the business by providing management support, developing realistic financial forecasts, and negotiating accommodations with suppliers, owners and other creditors. .