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Shelley Hunter

What Happens to Gift Cards if a Franchise Goes Out of Business?

Successful franchise business consultant shares expertise on what happens to gift cards when a franchisee declares bankruptcy or goes out of business.

What is a Franchise Business?

I recently sat down with Brandon Neilson, founder of White Mark Development, to better understand how gift cards work when a store or restaurant is a franchised business. If you’re not familiar with what a franchise business is, the term franchise refers to “a method of expanding a business and distributing goods and services through a licensing relationship.”

Many companies use the franchise model to expand or scale their businesses. Some of the most popular franchise businesses include restaurants like McDonalds, Subway and Domino’s Pizza and non-food merchants like Great Clips, UPS Store, and several popular hotels.

As a consumer, I don’t always know (or care) if a particular location is franchised. If I go into a Subway shop, for example, I expect the store to look like all the other Subway stores I’ve been to, to accept the same Subway gift card in my wallet and to make the same Subway Italian B.M.T. I normally order. And frankly, Subway wants that uniformity for me as well.

Though the stores may all look and feel the same, since each franchised business is run by a separate entity, accounting for gift cards can be a little tricky.

How Do Gift Cards Work in a Franchise Business?

small business owner

Franchise business owners operate as separate entities from the franchisor. Each franchisee has to lease retail or restaurant space for the new business, build out the site, get cash registers, hire employees, set up accounting and payroll systems, and so forth. The franchisor is available to help and often has a template or turnkey system that the franchisee can (or must) follow, but ultimately each franchisee is responsible for his or her business.

When it comes to gift cards, however, the franchisor’s gift card system must ensure that gift cards issued at one location will work in another. Though I am not privy to the actual books at each company and businesses operate differently anyway, but the basic flow is this:

  • Purchase: Customer buys a gift card from Store A and gives the gift card to a friend.
  • Redemption: The friend redeems the gift card at Store B.
  • Reconciliation: The corporate accounting system ensures the redeemed amount is transferred from Store A to Store B.
  • Non-Use: The unused portion of the gift card could eventually become revenue for Store A, escheat to the state, be deemed unclaimed property for the customer, or any number of other outcomes depending on where the business is located.

This is obviously a simplistic view of how gift cards work when a business is part of a franchise. Exactly how money transfers from one franchisee owner to another is something each corporation handles and I’m sure the accountants for each entity are involved every step of the way. But in general, gift cards to franchised businesses work across locations so consumers do not have to worry about whether or not a gift card purchased from one franchisee will be accepted by another.

But what happens to unused gift cards when one of those franchisees goes out of business?

What Happens if a Franchisee Goes Out of Business?

store closed sign

If a single franchisee goes out of business or declares bankruptcy, unredeemed gift cards should still be usable in other corporate or franchise locations. Following the scenario above, however, the store that redeems the gift card (Store B in my example), may not be reimbursed for the redemption if the store that issued the gift card (Store A in my example) is no longer able to pay the bills. But in general, to consumers, a single closed franchise simply means an outstanding gift card must be used online or at another location.

If there are no locations nearby and using the gift card online is not an option, then the gift card holder may not be able to redeem the card at all. He or she could file a claim with the store’s bankruptcy handler or take the owner to small claims court to get reimbursed for the unusable card, but there is no guarantee the claim will be accepted. The consumer might also appeal to the franchisor, but the corporation is under no obligation to provide reimbursement for the gift card either.

As a last resort, consumers could sell their unusable gift cards on the secondary gift card market, however, most resellers will only buy pre-owned gift cards that are redeemable nationwide.

See this list of nationwide stores in bankruptcy.

6 Things to Do with Your Unused Gift Card

If you have a gift card to a store that is part of a franchised business and one of the franchisees in your area closes its doors, consider the following ways to use your gift card or be reimbursed for the unusable portion of the card:

  1. Use it. Use the gift card online or at another location.
  2. Contact the Corporation. Contact the franchisor to see if the company will offer reimbursement or another alternative.
  3. File a Claim. File an “unsecured creditor claim” with the franchisee’s bankruptcy handler or go to small claims court.
  4. Dispute the Charge. See if you can dispute the charge on the debit or credit card used to buy the gift card or check for other purchase protection.
  5. Sell it. Sell the gift card on the secondary gift card market.
  6. Donate it. Sell or donate the gift card to someone who lives near a franchise that is still in business.

More Questions about Gift Cards and Franchises?

I always suggest people use the gift cards they receive as soon as possible. The longer you hold onto a gift card, the higher the likelihood that you’ll lose the card, forget to use it or find out the store has gone out of business. Sometimes, however, stores close quickly and often times shortly after gift cards have been purchased. If that happens, I would quickly make every attempt to use the gift card or dispute the charge on my account. While there is no guarantee you will be reimbursed, I think it is worth a try.

What other questions do you have about gift cards and franchises? Let me know in the comments below and I’ll get back to you as soon as possible.

Happy Gift Carding!

~Shelley Hunter, Gift Card Girlfriend

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