As a franchisor, you understand that the reputation of your brand depends on the success of your franchisees. To increase the chances that your franchisees will succeed, you will likely spend considerable time revising and amending your standard franchise agreement so that is covers every possible contingency and makes your objectives clear to your franchise owners. Included in that agreement will be factors that may result in the termination of the franchise agreement.
Undoubtedly, the decision to close down a franchise owner’s business will not be an easy one. Additionally, you may not have the right to terminate a franchise owner’s business without good cause without violating the franchise agreement. This is why it is critical that your agreement includes clear language regarding when and how you may end your relationship with a franchisee.
Reasons to shut it down
You have a vision for how your franchises should look and operate. Perhaps it is important to you that all your franchises have the same atmosphere and similar methods of customer service. On the other hand, your franchise owners may have more freedom to bring their own ideas and personalities to their businesses. However, in most cases, the following factors may constitute a violation of the franchise agreement, allowing you to terminate the agreement:
- You discover that the franchisee was untruthful when applying for a franchise.
- The franchisee is unable to remain solvent, such as paying for inventory, paying rent for the business’s location or paying employees.
- The franchisee fails to pay the royalty fees as outlined in the agreement.
- The franchise is not making money.
- The franchisee refuses to comply with policies and procedures in the agreement.
- The franchisee’s involvement in criminal activity threatens the reputation of your company.
In many of these cases, you may be able to communicate with the franchisee and offer some guidance before the issue becomes a problem serious enough to terminate the agreement.
Not cut out for franchising
Some franchisees discover that the work and responsibilities of running a franchise become too much, and they will simply abandon the venture. About 37% of those who undertake a franchise quickly learn it is not what they expected it to be.
When this happens, they may divide their attention between the franchise and some other project, or they may just walk away from the franchise altogether. You are not likely to get much argument from these franchisees when you terminate the contract. However, at any time you decide to cancel a franchisee’s agreement, you would be wise to anticipate a legal contest.