Can a franchisor terminate the franchise agreement? The answer is yes, if you stick to the official process set out within it. Keep reading to find out how you break up with a franchisee without risking your money and reputation.
There are many reasons why a franchisor might consider franchise termination with one of their franchisees. Maybe the business unit hasn’t performed as well as it should have done, or perhaps the franchisee hasn’t been honest about their income figures. Here are some of the reasons you might decide to act against a franchisee:
- The franchise unit isn’t reaching the minimum quality or performance standards
- They’ve set up a competing business
- They’ve been dishonest about their income figures to reduce their fees
- They’re not paying their fees
- They’re refusing to do ongoing training
- They’re registering for insolvency
- They’ve abandoned the franchise unit
When are you within your rights to terminate a franchise agreement? Keep reading to find out.
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When can a franchisor terminate the franchise agreement?
There are two situations in which you can break up with a franchisee:
- The franchisee has breached one of the clauses in the franchise agreement which gives you the right to terminate if broken
- The franchisee has made a serious ‘repudiatory breach’ - the court decides whether an action qualifies in this category
Most franchise agreements give the franchisor the right to end the contract if the franchisee:
- Doesn’t have the necessary licenses
- Commits a crime
- Doesn’t pay fees or royalties
- Goes bankrupt or insolvent
- Ignores the franchisor’s instructions about the location, branding, and operations of the unit
- Breaks rules surrounding business operations
How to terminate the franchise agreement as a franchisor
When you decide to break up with a franchisee, one of the first things you need to decide is how you’ll resolve the issues you’re facing. You have several options when it comes to terminating a franchise agreement:
- Give the franchisee ‘notice’ by letting them know about the concerns you have and giving them the chance to rectify the problem(s). If they can resolve the issue, there may be no need to terminate the agreement, which will save you time and energy - and possibly your reputation - in the long run. If they can’t, you should continue with the contract termination process.
- Come to an agreement with the franchisee and work together to sell the business. Alternatively, they could surrender the unit to you, and you could sell it yourself, giving a portion of the purchase money to the franchisee, or using it to cover their debts. Working with the business owner is in your best interests, as you won’t have to list the handover as a franchise termination to prospective investors, who may be put off.
- Wait for the franchisee to complete their agreement term and then don’t renew their contract. This may be a good idea if the investor has almost reached the end of their contract period, but you may not be within your rights to do this unless the franchisee has breached the agreement.
- Give yourself time to investigate a potential breach of contract by suspending it and temporarily stopping the franchisee from working under your brand. Once you’ve got more information, you can decide whether to go ahead with the agreement termination or not.
- Immediately terminate the contract if you find out about a serious issue. You may have grounds to take this step if the franchisee goes bankrupt, voluntarily abandons the business, or risks public health and safety through their operations.
Break up with a franchise - here’s what to do
1. Take legal advice
If you spot an issue, the first thing you should do is consult a legal professional - ideally a franchise specialist. They’ll be able to give you clear advice on how to proceed with the termination process.
If you act outside the regulations set out in the franchise agreement and wrongfully end a franchisee’s contract, there may be serious consequences. The franchisee could make a ‘lost profit claim’ for the outstanding agreement term, or even a claim for the amount of money they would eventually have made by selling it.
2. Issue a breach notice
If the franchisee has breached the contract, you must send them a ‘breach notice’. This document covers the key information relating to the case. You should include:
- Details about the breach(es), with reference to the franchise agreement
- How they can remedy the breach
- A deadline for remedying the breach
- A statement explaining that the franchise contract will be terminated if they fail to resolve the breach
A legal consultant will be able to help you draft your breach notice.
This step is a key element of the franchise contract termination process, but if the franchisee resolves the breach, you can no longer end the agreement.
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3. Start court proceedings if necessary
Sometimes, the franchisee isn’t cooperative, and franchisors need to take matters into their own hands. If this is the case, you may need to go to the court to continue the contract termination process. This step will help you recover any money owed to you, either in the form of unpaid fees and royalties, or damages for early agreement termination.
4. Monitor franchisee requirements
As the franchisee prepares to exit the franchise, they’ll need to tie up all the loose ends. Be sure to keep a close eye on proceedings and make sure the franchisee acts within the contract regulations before and after they leave the business. They should:
- Return any franchise documentation, including operations manuals
- Pay all their outstanding fees, as well as costs for any other claims
- Stop using the franchise’s trade name, trademarks and trade secrets
- Sign a ‘Covenant Not To Compete’ or ‘No Compete’ agreement, so they don’t start a rival business after they leave
- Part on a positive note
Trying to break up with a franchisee can be stressful, but you should always try to act respectfully and professionally. If you can help the franchisee see your point of view and fully understand the reasons why you’ve taken steps to terminate their contract, they’ll be more likely to cooperate.
If, on the other hand, you rush into the process with a negative attitude, the franchisee may dispute your claims. This will slow progress and could create bad publicity for the business, discouraging would-be customers and investors alike.
You can find more information about franchising in our articles for franchisors.
Alice Tuffery, Point Franchise ©