Advisory Jul, 15 2011

Cautiously parting ways with franchisee

In course of business, a franchisor may have to part ways with its franchise partner by terminating the franchise agreement. It is perhaps one of the trickiest decisions for a franchisor to make given the intricacies involved relating to legal and compens

By Namita Bhagat
Feature Writer
Cautiously parting ways with franchisee

The Indian laws permit any agreement between private parties to be terminated whether the nature of the agreement is terminable or interminable nature? The point of consideration here is when the agreement is terminated abruptly without conveying any rationale for doing so by either party the defaulter is liable to pay compensation for unlawful termination.

Franchisor’s deliberations

The decision to terminate a franchisee should be taken when it is absolutely necessary.Also, the franchisor should have necessary arrangement for his protection for being held responsible for the acts that the franchisee has committed before the franchisor calls off the agreement. A franchisor must deliberate enough before terminating its franchisee. It is necessary that franchisor does its homework relating to the terms and clauses of the contract for franchise termination before signing the franchise agreement. Therefore, taking expert professional advice is advisable.

Also, post termination, the franchisor has to select the future course of that franchise territory. The franchisor may have to end the agreement with its franchisee amicably or if the situation demands, it can be a hostile termination as well.

Grounds for franchise termination

A franchisor can terminate the franchise contract on commercial as well as legal grounds. The contract can be rendered void in the event of the non performance of the binding contract by franchisee or its hindering the franchisor’s performance. The circumstances which may force the franchisor to take such step include:

Commercial factors: The franchisor may end its partnership with its Master Franchisee or franchisee if:

  • The association is not commercially viable anymore in terms of profitability and/or continuing with the business in that territory.
  • The franchisee becoming bankrupt or insolvent or involved in any criminal activity, the franchisor can salvage its reputation only by ending its franchise relation with that partner.
  • Loss of essential certifications or leases and not been able to retain the Goodwill of the franchisor.
  • Franchisee not been able to pay royalties, generate sales and profits etc
  • Franchisee fails to comply with franchisor's directives regarding the location of the franchise outlet, its appearance, logos or other operational aspects of the business.
  • Expiry of the term of the contract or when the franchisee opts out of the renewal of the franchise contract then the franchisor has to terminate that franchisee.

Legal factors: The franchisor may choose to terminate its franchisee when:

  • There is a ‘material breach of the contract’ by the franchisee.
  • The franchisor may do so when the franchisee  tempers with the franchisor’s trademarks and/or abuses other intellectual properties.
  • The franchisor may not like the loss of Goodwill due to non performance of the franchisee.
  • Moreover, the franchisor needs to guard against its franchisee wanting to utilise the goodwill established while in contract and do the business in the same territory with a different identity.

Termination process

The process of termination of the franchisee can be initiated according to the terms in the franchise agreement and the termination clause. Generally, the franchisor would require to serve a notice to the franchisee. In some cases, the contract provisions would require that the franchisor gives a certain amount of time to the franchisee to mend the fences i.e. its default before the franchisor terminates it. It is very critical for the franchisor to do its due diligence in context of his legal position as many times, law may protect the franchisee even if it has been on fault. In event of the franchise termination, the franchisor has several options at its disposal. The franchisor may exit the particular territory altogether or appoint a new franchisee there.

Post termination

The franchisor’s work is not over after franchisee termination. It has several post termination issues to deal with. The franchisor would not want unnecessary disputes and litigation. Therefore, the franchise agreements should include the rights and obligations of both the parties in event of termination of the franchise agreement. In context of the franchisor, the agreement should cover the following points like:

  • The franchisor will require to repurchase rights for the inventory or stock under its brand  which has its trade name, trade marks or service marks on them
  • Retrieve its catalogs and manuals  from the franchisee
  • Make sure that the franchisee duly pays all the outstanding amounts to the franchisor.
  • The agreement should bar the franchisee from using the trade secrets of the franchise once it has ended. Also, it should refrain the franchisee from using the franchisor's trade name, trademarks, etc
  • The franchisor may need to direct the franchisee to alter the appearance of its business so that it is distinguishable from the franchisor’s
  • Also, the franchise contract should have a clause by which the franchisee is barred from competing with the franchisor in that territory for a certain period namely ‘covenant not to compete’.


The franchisor may have to part ways with its franchisee partner when the franchisee decides to sell its business and cannot continue. The other reasons may include the franchisee is not following the franchisor’s system or not performing. In India, there are several laws that apply to franchise business and there is no specific franchise legislation, therefore, the franchisor requires taking ample care while deciding to terminate its franchisee. It is only in the interest of the franchisor to draft the franchise agreement carefully and include the termination clause along with related terms and conditions for both the parties. Moreover the franchisor should take expert advice to carry the termination process smoothly, efficiently and swiftly as it can be a costly as well as time consuming affair.Also, the franchisor should undertake the required damage control exercise in such an event to guard against any loss of reputation.

Related: Smart franchisees convert visitors to buyers

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