What does 'full compensation' include if an Exit Franchisee's bankruptcy prevents termination?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
For purposes of this paragraph, full compensation shall include full payment of any losses suffered by Subfranchisor due to Franchisee's actions or inaction, and adequate assurances or prompt and full compensation shall include, at a minimum, immediate presentation to Subfranchisor by Franchisee of an irrevocable letter of credit in an amount sufficient for full compensation of Subfranchisor (as defined above), issued to the account of Franchisee by a commercial bank, payable to Subfranchisor, at sight, within thirty (30) days from the date thereof, upon presentation of any affidavit signed by Subfranchisor stating that Subfranchisor is entitled to payment pursuant to this Agreement.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, 'full compensation' in the context of a franchisee's bankruptcy includes full payment for any losses the subfranchisor suffers due to the franchisee's actions or inaction. To ensure adequate assurances or prompt and full compensation, the franchisee must immediately provide the subfranchisor with an irrevocable letter of credit.
The letter of credit must be in an amount sufficient to fully compensate the subfranchisor, issued by a commercial bank in the franchisee's name, and payable to the subfranchisor upon sight. The subfranchisor can access these funds within thirty days of the letter's date by presenting an affidavit stating their entitlement to payment under the franchise agreement.
This requirement protects the subfranchisor from financial losses resulting from a franchisee's default, even if bankruptcy proceedings complicate the termination process. By securing a letter of credit, the subfranchisor gains immediate access to funds to cover damages, ensuring they are not left vulnerable during legal proceedings. This mechanism aims to provide a swift and guaranteed remedy for the subfranchisor in the event of a franchisee's financial instability and potential breach of contract.