When the Parent Company Drags You Down

NEW YORK (MainStreet) -- If you're one of the 3,500 Quiznos franchisees, this is not a happy time.

You're watching as your parent company heads into a debt restructuring program. The company, a chain of sandwich shops known for toasted subs, had been trying to negotiate with its creditors, store landlords and others to avoid bankruptcy, but Quiznos and its creditors agreed this week to hand over majority ownership to Avenue Capital Group, according to The Wall Street Journal.

Some 3,500 Quiznos franchisees may be worrying they'll be dragged down by their parent company's troubles.

The hedge fund will invest $150 million into Quiznos and convert some debt to equity to save the company from bankruptcy. Quiznos had taken on massive debt five years ago in a leveraged buyout. Apparently the sandwich chain has also been struggling with declining sales (not shocking, since Subway and other competitors can do toasted subs as well) and violated its debt terms over the summer, the Journal says.

"Improving our balance sheet and putting our capital structure issues behind us are major steps forward to strengthening the Quiznos brand and our customer experience," Quizno's CEO Greg MacDonald said.

It's just one of many franchise chains that have had financial woes, especially with the effects of the Great Recession clinging stubbornly. Over the years, some have been able to avoid bankruptcy by agreeing to major restructuring agreements such as Quiznos'; others were sold, with most corporate-owned stores liquidated in the process; and some rose again led by turnaround experts. Denny's, Sizzler, Schlotzsky's, Bennigan's and 7-Eleven are all examples of where the former parent went bankrupt, yet the brand survived and in many cases thrived.

"Of course, these stories mask many of the day-to-day implications and practicalities of dealing with a franchisor in bankruptcy," writes franchise lawyer Jeff Fabian in a contributed piece for FranchiseHelp.com.

"Sometimes the effects can be minimal, but other times -- with small and large franchisors alike -- a franchisor's bankruptcy can significantly impact the success or failure of a franchisee's operations. From loss of supply of branded inventory, to loss of affiliation with the franchisor's trademark entirely, to loss of operational support, to customer confusion or defection as a result of less-than-flattering headlines, franchisors' bankruptcies can have real and long-term effects for the businesses of their franchisees," Fabian writes.

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