Running a franchise may seem like an easy job to those outside the industry. However, any franchisor who has experienced issues with a franchisee knows how tough it can be. Different states have different laws governing franchises. Some states may favor the franchisor over the franchisee and vice versa.
You need good cause for termination
In California, the California Franchise Relations Act governs the franchise termination process. To remove a franchisee before the end of the franchise agreement, the franchisor must demonstrate good cause for breaking the contract. According to the California Legislative Information site, good cause is defined as substantially failing to comply with lawful requirements laid out in the franchise agreement. The franchisor must give the franchisee at least 60 days to resolve any failed compliance.
What if the franchisee’s behavior is extreme?
In extreme cases, the franchisor need only give a 10-day notice of termination to the franchisee. If your franchisee breaks the agreement with any of the egregious behavior below, this would fall under that shortened timeframe.
- Franchisee is subject to an order of relief in bankruptcy or is deemed insolvent
- Franchisee does not open the business for five consecutive business days, and that failure to operate is not due to fire, flood, earthquake or similar events
- Franchisee misrepresents him or herself financially while becoming a franchise
- Franchisee is convicted of a felony or other criminal conviction that relates to running the franchise
- Franchisee fails to pay franchisor fees even after written notice that it is overdue is given
- Franchisor determines the franchisee’s operations pose an imminent danger to public safety or health
You may need to buy back inventory
Changes to the California Franchise Relations Act added stipulations regarding purchases franchises may need to make even with lawful terminations or not renewing a franchise agreement. The franchisor is obligated to buy all supplies, inventory, furniture, equipment, and fixtures the franchisee bought from the franchisor or from a supplier laid out in the franchise agreement. As a franchisor, you must also pay the same as the franchisee, factoring in depreciation.
There are some exceptions to items included in these buybacks. Items not required to run the business are excluded, as well as items not on premises when the franchise is not renewed or terminated.
Additionally, there are situations when you may not have to buy any of these items back. If you and the franchisee agree to terminate or not renew the agreement, you are not required to purchase these items. Another reason you would not be on the hook for inventory is if your franchise announces it is no longer pursuing franchises in that area.
Terminating a franchise agreement is a complex process that may favor the franchisee in California. If you are unsure of your legal obligations, you may consider reaching out to an attorney experienced in handling business litigation cases. He or she can advise you about the best way to proceed through this process.