What options does Checkersrallys have in the event of a franchisee's default on outstanding notes receivable?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
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, not all notes are collateralized. Interest on outstanding notes is charged according to the terms of the promissory note and is recognized on a period basis over the term of the note.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, Checkersrallys extends funds to franchisees for restaurant sales, past due rents, and royalties, which are documented as notes receivable. If a franchisee defaults on these notes, Checkersrallys has specific remedies. For secured notes, the restaurant's assets often serve as collateral. In the event of default, Checkersrallys has the option to acquire these restaurant assets. The consideration Checkersrallys provides will include the balance of the outstanding notes. However, it is important to note that not all notes are collateralized, meaning Checkersrallys's options may be limited in those cases.
This arrangement offers Checkersrallys a degree of financial protection. By securing notes with restaurant assets, Checkersrallys can recover some of its investment if a franchisee fails to meet their obligations. The ability to acquire the restaurant assets provides a tangible means of recouping losses, especially when the franchisee has a sublease in place or a personal guarantee. This is a fairly standard practice in the franchise industry, where franchisors seek to minimize financial risk through various security measures.
However, the FDD also states that not all notes are collateralized. This implies a higher risk for Checkersrallys in cases where the notes are unsecured. In such instances, Checkersrallys's ability to recover the outstanding balance may depend on the franchisee's financial condition and any personal guarantees in place. Prospective franchisees should inquire about the specific conditions under which notes are secured and the implications of defaulting on secured versus unsecured notes. Understanding these details is crucial for assessing the financial risks associated with the franchise agreement.