What happens to the assets of the Franchisee in the event of insolvency and liquidation regarding claims from both the Franchisor and Guarantor for a Buona franchise?
Buona Franchise · 2025 FDDAnswer from 2025 FDD Document
Guarantor hereby expressly subordinates any claim Guarantor may have against Franchisee, upon any account whatsoever, to any claim that Franchisor may now or hereafter have against Franchisee.
In the event of insolvency and consequent liquidation of the assets of Franchisee through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Franchisee applicable to the payment of the claims of both Franchisor and Guarantor shall be paid to Franchisor and shall be first applied by Franchisor to the amounts due to Franchisor from Franchisee.
Guarantor does hereby assign to Franchisor all claims which they may have or acquire against Franchisee or against any assignee or trustee in bankruptcy of Franchisee; provided however, that such assignment shall be effective only for the purpose of assuring to Franchisor full payment of all amounts due under the Franchise Agreement.
Source: Item 22 — CONTRACTS (FDD page 78)
What This Means (2025 FDD)
According to Buona's 2025 Franchise Disclosure Document, in the event of insolvency and liquidation of a franchisee's assets, Buona prioritizes its financial claims over those of the guarantor. This means that if a Buona franchisee faces bankruptcy, assignment for the benefit of creditors, or voluntary liquidation, the assets available to pay both Buona and the guarantor will first be directed to cover the debts owed to Buona.
This provision protects Buona by ensuring they receive payment before the guarantor in situations where the franchisee is unable to meet their financial obligations. The guarantor essentially agrees to take a secondary position regarding claims against the franchisee's assets. This subordination is a common practice in franchising, as it strengthens the franchisor's financial security.
Furthermore, the guarantor assigns all claims they may have against the franchisee to Buona. This assignment is specifically intended to ensure Buona receives full payment of all amounts due under the Franchise Agreement. This gives Buona additional leverage in recovering outstanding debts from the franchisee during insolvency proceedings.
For a prospective Buona franchisee, this clause highlights the importance of understanding the financial risks involved and the role of the guarantor. The guarantor should be fully aware that their claims against the franchisee are subordinate to Buona's, and they are essentially providing a financial safety net for Buona in case of the franchisee's financial distress.