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When you must sever ties with a franchisee

At some point in your business relationship, it may become painfully evident that it is necessary to sever your ties with a franchise owner. Whether you are the the franchisor or a shopping center owner, this can be a complex undertaking, as there are both California and federal laws governing the operation of franchises.

In other words, it might be a lot easier to evict the local mom-and-pop restaurant than it is to shut down the local In-N-Out burger joint. So, where do you start?

Get your legal ducks in line

If you are a franchisor who needs to take a franchise off the market, you must first establish a legal good cause to take such action. In order to do that, you should first review your franchise contract.

Therein shall be all the reasons that you are legally cleared to terminate the franchise. While these vary across the industry and state by state, below are some common reasons for severing those ties:

  • A franchise has become a public hazard
  • The franchisee was charged with a crime
  • The franchise was abandoned

In these situations, both franchisor and franchisee have their own specific rights and responsibilities under the terms of the contract and the applicable laws. Knowing when it's appropriate to take action to terminate the arrangement is crucial.

Most franchisors have attorneys on retainer to handle these matters. As soon as you anticipate a problem, it's time to make that call and loop them in to the situation.

What about franchisees' rights?

If you are a franchisee and the franchise owner wants to remove it from the market against your will, you may be able to block their actions. But you need to move quickly.

Both parties have the option of terminating the franchise by transferring ownership, removing it from the market or selling it outright. Sometimes, it's a simple matter of dickering until the right dollar amount.

The franchisor and franchisee may be able to reach accord about the future of the business if both agree not to renew the franchise agreement or it can no longer operate due to a natural disaster or other untenable problem. The death of the franchisee or if they are ill or declared to be insane are also grounds for termination.

Why else may franchisors terminate franchise contracts?

Franchisees who regularly flout the rules or violate laws risk immediate termination. Other reasons to sever ties can include failing to pay their dues, falling below sales goals or failing to meet the standards of performance as laid out in the contract.

Because these are complex legal matters, it is generally best to let your Orange County attorney handle the matter.

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