What options does Checkers have in the event of a franchisee's default on outstanding balances?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
Although the Company maintains an allowance for credit loss, the majority of the balance relates to specific accounts where collection is not expected. The reserves are established using the specific identification method based on our best estimate of the collectible balance. When determining collectability, we evaluate the debtor's financial condition, the historical experience with the debtor, and the pledged security interest value, if any. The Company has traditionally experienced a high rate of collection as the franchise agreements frequently provide remedy to the Company in the event of the franchisee's default on outstanding balances through a security interest in the assets of the business when a sublease is in place or through a personal guarantee of the franchisee.
Notes receivable consist of funds extended to franchisees as consideration for the sale of restaurants and repayment terms on past due rents and royalties. Specific allowances are established when collection is no longer deemed likely. With respect to secured notes, the assets of the associated restaurant often act as collateral. In the event of default, the Company has the option to acquire the restaurant assets, with the balance of the outstanding notes included in the consideration provided by the Company. However,
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, Checkers has several remedies available if a franchisee defaults on outstanding balances. The franchise agreements frequently provide Checkers with a remedy through a security interest in the assets of the business when a sublease is in place. Alternatively, Checkers may pursue a personal guarantee of the franchisee. These measures help Checkers ensure a high rate of collection on accounts receivable from franchisees.
In addition to security interests and personal guarantees, Checkers also extends funds to franchisees in the form of notes receivable for restaurant sales and repayment terms on past due rents and royalties. When these notes are secured, the assets of the associated restaurant often act as collateral. In the event of default on these notes, Checkers has the option to acquire the restaurant assets, with the balance of the outstanding notes included in the consideration provided by Checkers. However, it is important to note that not all notes are collateralized, which could affect Checkers' recovery options in case of default.
These financial arrangements are typical in the franchise industry, as franchisors seek to minimize their financial risk and ensure franchisees meet their obligations. Prospective Checkers franchisees should understand the implications of these default remedies, especially concerning personal guarantees and the potential loss of restaurant assets. It is crucial to review the franchise agreement carefully and seek legal counsel to fully understand the obligations and risks involved.