Advisory 2013-12-18

Terminating the franchise agreement

How to avoid franchise exit! Franchising doesn’t suit all. Read on to know about factors that lead to the termination of a franchise agreement….

By Chief Sub Editor
Terminating the franchise agreement

Franchise business will rake in the money is just a myth. The truth is – it’s not a cake walk for every business investor. Profits will only drive in if both the parties work in camaraderie. It is said that franchising is a proven business model but it’s not just everybody’s cup of tea. To make it run, it requires sheer dedication, patience and financial capability to boost the brand’s growth.

The franchise agreement fails owing to countless factors. Every year, many investors or aspiring entrepreneurs enter into the world of franchising by hoping that as a proven concept it won’t fail. But it’s surprising to know that, many franchisees fail to make profits in the first year itself and fail to pay royalties which further becomes the reason of franchise termination.

As we all know, franchise agreement is signed for fixed term, it may be for five or 15 years. It depends on the franchisor and the franchisee that for how long it lasts. There could be various reasons for ending the franchise agreement starting from brand’s violation by the franchisee, breach of franchise agreement by a franchisee, non-payment of franchise or a royalty fee and lastly, not maintaining the brand’s franchise as per the guidelines given by the franchisor. Commenting on points that could lead to franchise termination, Alok Sanghi, Head – Legal, Franchise India, says: “The franchisors can terminate the franchisee on a number of issues like default in payment of franchise fee, royalty or margins as the case may be or non-payment of central/local marketing fund or infringement of trademark in any manner, indulging in sub franchising or due to any contravention of franchise agreement.”

From following the franchisor’s obligations to maintaining the quality standards on par, the franchisee has to make constant efforts with regard to maintaining the brand’s image in the market. If he/she fails to maintain then, it is certain that it will damage the brand’s image. Since the franchisor has built his name in the market therefore, the right of terminating the agreement with franchisee remains with the franchisor and he/she can terminate the agreement before the expiry of the agreement. The franchisor may terminate the agreement by giving a notice in writing to the franchisee if he/she has committed any material breach of his obligations specified under this agreement, or if any sum, required to be paid under the terms, has not been paid, at the latest, within 21 days following its due date. To both the franchisor and franchisee, Alok Sanghi advises: “The franchisors and franchisees should ensure that their exit strategy is clearly stated in the franchise agreement and even if the need arises to exercise such an option to exit the business agreement then their exit is a win-win situation for both the parties.”

On the plus side, franchising gives a kick-start to your dreams and most investors benefit from an established system that likely has overcome all start-up challenges and mistakes. But, it is also true that one may lose all his money. Therefore, before you invest in a franchise business, it’s also important that franchisee does an in-depth research pertaining to franchising business, franchisor’s reputation in the market, talk to the brand’s existing franchisees and the brand’s competitors so as to understand the business proposition they offer to the prospective franchisees. Also, before investing in a franchise business, it is  must for the potential franchisees to consider the potential return on investment (ROI).

If you don’t want to get into a trap then, it is advisable to hire a franchise lawyer. Franchise lawyer will further explain the terms mentioned in the agreement. Don’t just fail to consider an exit strategy. Before just signing the deal, make sure that you know about the contract details for exiting the pact.

Comment
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Malvika : 03, Sep 2010 at 01:12 AM
Right medium of communication could provide an `out of the box ` Indian prospective to the franchisee=-franchisor relations. Business relations in India have always been personal and if retailer keep this in mind which managing their franchise relations, it could lead to long term franchisee satisfaction and hence great business!!!
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