Franchise Termination

As you consider franchising your business, franchise termination is probably the last thing you want to consider having to do. However, you would be remiss to ignore this very important aspect of franchising.

Franchise termination is to franchising as divorce is to marriage. Just as a young couple blissfully in love might think it inconceivable that their union can end in divorce, franchisors might resist considering the possibility that their agreements with their franchisees could someday go sour. In both cases, hope and optimism are forefront on the minds of the parties involved. However, it quickly becomes evident that hope and optimism do not guarantee the success of any marriage or franchise relationship. Even in the best of cases, things can go wrong, and when they go wrong, it is important for there to be a well thought-out plan to follow. This is why it is important to address the possibility of franchise termination in the reams of documents that you put together for your franchisees to sign.

 

Franchise Termination’s Place in Your Documents

 

Devoting time to franchise termination in the documents that define and govern your franchise relationships is important because it lays out a set of guidelines that you can follow when it becomes impossible to sustain a franchise relationship. Considering that franchising often involves taking on large numbers of franchisees, it is reasonable to assume that this is going to happen with at least one of your franchisees.

The reasons that would inspire a franchisee to withdraw from a franchise agreement vary. Likewise, the reasons that would inspire a franchisor to terminate the agreement also vary. Because it is expensive to set up and to maintain a franchise in the first place, the reasons given for termination would have to be good. Backing out of a franchise relationship for frivolous reasons would simply cost the franchisor and franchisee too much.

Ideally, the franchise agreement or franchise disclosure document should detail the circumstances under which termination is justified, the steps that can be taken to remedy the problems, and, if they should fail, the steps involved in the termination process. The terms surrounding termination may put the franchisees at a considerable disadvantage, and, unfortunately, you may be tempted to use this to your advantage. However, you should be careful about this. It is relatively easy to cross the line into the realm of franchise fraud if you handle terminations in an irregular manner. So it is in your best interests to ensure that you clearly lay out all the franchising terms devoted to termination to your franchisees before they sign on. Subsequently, you should follow these terms to the letter if you end up having to terminate the franchise relationship.