Generally speaking, franchisors and franchisees have positive relationships. However, in rare cases when the relationship between a franchisor and franchisee does not feel right, terminating the Franchise agreement at renewal time may be the most beneficial move.
This Blog will explain how to end a franchise agreement, some common reasons why franchise contracts don’t renew, and some top franchisor tips for ending a franchise agreement gracefully.
Reasons to avoid franchise agreement renewal
Franchising involves a lot of decision-making and responsibility, and it isn’t always easy. The key to a successful franchise operation is finding fantastic franchisees who will support your vision and make your life easier. Two ways exist for you to end a business relationship with a franchisee if you feel you’ve found the wrong franchisee:
Termination of the franchise agreement – The agreement is canceled before the end of a franchisee’s contract term.
Non-renewal of the franchise agreement – The agreement is not renewed at the end of a franchisee’s contract term.
To make the best decision, you’ll need to have a thorough understanding of the different franchise renewal rights available to you. A franchisor can terminate or refuse to renew a franchise agreement if a franchisee has committed a “repudiatory breach”.
When a contract is breached by a repudiatory breach, the non-defaulting party is entitled to terminate the contract and is thereby released from its terms. As there are risks if you get it wrong, it’s important that you are certain of your position. —Eldwick Law
Examples of contract breaches that would fit this bill include:
- Failure to obtain the correct licenses
- Being involved in illegal activities
- Failure to pay franchise fees or royalties
- Bankruptcy
- Neglecting to follow franchisor guidelines, such as operations instructions and branding and marketing guidelines
How to end a franchise agreement
You can terminate a franchise agreement by:
1. Ensuring you have the right to do so
Depending on what kind of breach you are dealing with, this step will differ. The law of contracts gives different weight to different clauses, and some situations will be more clear-cut than others. Whatever you’re dealing with, be certain that you have the legal right to terminate or reject renewal before you reach out to the franchisee and get the ball rolling.
2. Notifying the franchisee
The following information should be included in your breach notice to your franchisee:
- How the franchise agreement terms have been violated (or breached), and the nature of the breach (or breaches)
- A timeline for making reparations, as well as information about how the breach can be repaired (if this is possible)
- There must be a clear statement that if the breach is not resolved, the franchise agreement will be terminated
It will no longer be possible to terminate the franchise agreement if a franchisee resolves the breach or breaches you’ve mentioned in this notice.
3. Tying up loose ends
The franchisee must pay any outstanding fees when leaving the franchise, and must return all paperwork and documentation regarding the franchise. At this point, a franchisee may also be required to sign an agreement promising not to start a competing business within a certain period.
There are four tips franchisors can use to end the franchise agreement in a conflict-free manner
- Always seek legal advice early
Get legal advice as soon as possible if you are uncertain whether you have a case for termination. Regardless of how simple or clear things seem, seek legal advice immediately. Do not contact your franchisee with a breach notice until you are absolutely certain you are in the right. Franchisees who wrongfully terminate agreements are likely to make legal claims against you, causing financial and reputational damage to your entire company.
You will be able to determine your next steps with the help of legal advice. The contract can be terminated immediately if a serious breach has been committed. The franchisee might also be suspended pending further investigation if your legal advisor advises you to do so.
- Turn to forced termination as the last possible option
Before terminating your franchise, communicate with your franchisee and offer ways to resolve the issue. Try to reach an agreement with your franchisee about the terms of their exit once you’ve decided definitively that you will be terminating the agreement through a forced termination. If you can do this, you’ll both come out of the relationship better off.
A new franchisee might be interested in buying the franchise location, for example. Therefore, the franchisor will lose less income and the franchisee will likely get back at least some of their investment.
- Show your willingness to compromise
Consider your situation carefully if you must choose between losing a one-time sum of money and ending your relationship with your franchisee without conflict. Despite the monetary loss initially appearing to be more problematic, it could solidify the good reputation of your franchise.
You’re much less likely to lose a franchisee if you show your willingness to compromise during negotiations and be mindful of their needs.
- End things on a good note
You should also do your best to end negotiations on a positive note. It is still highly recommended that you behave politely and professionally in the final stages of the franchise agreement, even if both parties have experienced difficulties during the process. This will reduce the chances that a franchisee will attempt to take legal action against you (whether this legal action is valid or not).
Effective franchisors prioritize their franchisees
The franchisor’s role includes prioritizing franchisee satisfaction as one of its most important responsibilities. Franchisees who are happy are hard-working and do their best to help your business succeed.
Sparkleminds can help you franchise your business both nationally and internationally. It has helped more than 500 businesses in franchising their businesses. So, what are you waiting for? Connect with us today!
