What specific financial instrument might an Exit Franchisee need to present to the Subfranchisor as assurance of future performance in case of bankruptcy?
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, in certain situations, an Exit franchisee may be required to provide an irrevocable letter of credit to the subfranchisor as assurance of their ability to compensate the subfranchisor for any losses resulting from the franchisee's actions or inactions. This letter of credit must be in an amount sufficient to cover the full compensation of the subfranchisor, as determined by the agreement.
The letter of credit must be issued by a commercial bank to the account of the franchisee and be payable to the subfranchisor upon sight. The subfranchisor can demand payment within thirty days of the letter's date by presenting an affidavit stating their entitlement to the payment under the franchise agreement. This mechanism serves as a financial guarantee to protect the subfranchisor against potential financial harm caused by the franchisee's failure to meet their obligations.
This requirement is triggered when the franchisee fails to provide adequate assurances or prompt and full compensation for losses suffered by the subfranchisor due to the franchisee's actions or inaction. The demand for a letter of credit is a measure to ensure the subfranchisor receives immediate financial protection. This is a fairly standard practice in franchising to protect the franchisor or subfranchisor from financial losses due to franchisee misconduct or failure to meet contractual obligations.