franchising aspects Nov, 21 2009

Steer clear of franchise termination

For an aspiring entrepreneur franchising paves the way forward. However, there are certain circumstances under which taking up a franchise can turn detrimental especially at the time of franchise termination. Read on to know the various terminating condi

By Ramanjit Kaur
Feature Writer
Steer clear of franchise termination

Franchising is one of the best options to start a business, though there are many instances that lead to termination of the franchise. The provisions related to the termination of a franchise should be incorporated in the franchise agreement. A defect or misinterpretation of the franchise agreement usually creates a situation of termination. Let us discuss in detail the various causes of termination, tips to avoid termination and consequences of terminating the franchise contract and how a franchisee can prevent the termination.

When a franchisor would terminate the franchise?

Though the termination of the franchise varies for all franchisors, still there are certain common causes of franchise termination. For instance, a franchisor terminates the franchise when

  • The franchisees fail to pay royalties,
  • Do not meet the performance standards,
  • Disregard the rules of the franchise agreement, and
  • Infringe the intellectual property rights of the franchisor.

It is not only the franchisor who can terminate the franchise; rather a franchisee can also cease it. A franchisee has a number of grounds to end the franchise agreement. Take for instance,

  • If a franchisor fails to fulfil his obligations in terms of training and support,
  • When he grants exclusive territorial rights to other franchisees in the same franchise territory,
  • When franchisor does not offers help in marketing the franchise unit (if mentioned in the franchise agreement),
  • In case the franchise business does not generate sufficient profits (if mentioned in the agreement),
  • If the franchisor has filed for bankruptcy in the court and
  • If the franchisor proposes few changes in the franchise agreement (after being signed by the franchisees),
  • Also, in case of insanity or infirmity or death of the franchisor or the franchisee.A franchisor terminates the franchise to maintain the asset value of his franchising company. Similarly, a franchisee terminates the franchise to save him/herself from the deceptions or losses.

Ways of Termination

The franchise termination clause is heavily weighted in the favour of the franchisor; therefore, it becomes imperative for a franchisee to consult an experienced franchise attorney to review the franchise agreement. Appointing an attorney makes sure that the agreement provides protection to him/her in case of franchise termination.

Basically, there are two popular ways of terminating a franchise, which are

  • The first option to terminate the franchise is by mutual consent. When both the franchisor and the franchisee agree to terminate the franchise business.
  • Besides mutual consent there are certain other situations in which a franchisor can instantly terminate the franchise (if he/she has the right to do so). Take for instance, in case a franchisee abandoned the franchise business, or convicted for a criminal offence, bankruptcy, repeatedly fails or operating the franchise in a way that can endanger public life. In such conditions, the franchisor can simply terminate the franchise without even serving the notice period to the franchisees.

Instructions to avoid termination

As a franchisee, it is advised to you to read the franchise agreement thoroughly to understand the rights and obligations. In case, if you do not understand any provision or part of the franchise agreement, consult your franchisor. Secondly, you must follow the franchise agreement strictly to avoid disputes. In last, you must pay your royalty or other monetary dues on time to gain confidence of your franchisor. These instructions will help you in avoiding the situations of franchise terminations.

Still, if your franchisor serves you with a notice of franchise termination, consult your franchise attorney. You can use the franchise agreement as an evidence to sue the franchisor. Do not sit back, seek advice from your counsel to prevent the termination of a valuable franchise.

In most of the cases, a franchisor terminates the contract due to the above mentioned reasons. The best way to avoid termination of your franchise business is by meeting the expectations of the franchisor. Try and follow the franchise instructions to keep your franchise safe and successful.

Consequence of franchise termination

Cancellation of the franchise before the completion of the contract has serious consequences on the franchisees. Franchisees just not lose their franchise but also the hard-earned cash, time and energy that they had put in to establish the franchise business. Along with this, they earn a bad name for life-time (as they failed to run a franchise successfully). With the bad name, a franchisee cannot even think of taking up another franchise business as the franchisors usually check the background of the franchisees before selecting them.

Hopefully, by now you must have enough information to avoid the situation of franchise termination and run your franchise business successfully.

Related: Add multiple brands to multiply profits

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