Terminating a Franchisee

When and how to terminate a Franchisee

Terminating a franchise mid- agreement is a process that should not be undertaken lightly.

The disclosure document states that all terminated franchisees should be listed for the three previous financial years.
No reason for termination needs to be provided in the disclosure document, but terminations do not present well to franchise prospects.

Franchise network morale needs to be considered. Is the franchisee to be terminated known by other franchisees to be unco-operative and a negative influence? or is the franchisee generally popular with franchisees but challenging and non compliant with the Franchisor? Tread carefully here.

So why would you consider terminating?

• The franchisee is not performing.

This can be a tricky one. "Not performing" can be subjective. Do you have a clause in your franchise agreement specifically addressing non or under performance? If you don't, it would be unadviseable to pursue this line of termination.

• The franchisee is not paying royalties.

This is a much easier situation to prove. Even the worst franchise agreements I see (and there are some shockers out there) contain a clause relating to termination in the case of non payment of monies due to The Franchisor.

The question should be why aren't they paying their royalties?

• The franchisee is in breach of the system and procedures and is non compliant.

Franchisors have varying approaches to non compliance. Some look the other way and allow non compliance to continue as "it's all too hard". Non compliance can be extremely damaging to a franchise system and impact upon other franchisees. Check the Franchisor obligations in your franchise agreement to remind yourself what your obligations are in respect to protecting the brand and the other franchisees' reputation by association.

Mediation can work well to resolve disputes and should not be overlooked. Either the Franchisor or the Franchisee can request mediation and the Franchising Code states that the other must agree to attend and share the costs equally.In Australia the Office of the Mediation Adviser can assist Franchisors on 1800 150 667.

Termination should always be a last resort.

So how do I terminate the franchisee?

Check your franchise agreement for the specific clauses relating to termination and follow the process point by point. The franchising code of conduct states that in the case of a breach of agreement by the franchisee;

The franchisor must give reasonable notice of the breach to the franchisee

Tell the franchisee what needs to be done to fix the breach

Allow a reasonable time for the breach to be fixed (not more than 30 days)

If the breach is fixed then the Franchisor has no grounds to terminate on this basis.

If the Franchisor wishes to terminate the agreement on other grounds, reasonable written notice must be provided with the reasons for the proposed termination.

The franchisor does not have to comply with these termination conditions if the franchisee:

• no longer hold a licence needed to carry on your business
• become bankrupt or insolvent
• abandon the franchise
• are convicted of a serious offence
• operate the business so that it endangers public health or safety
• agree to terminate the franchise agreement

The franchise agreement must be clear on this termination process. If you feel your agreement does not contain a comprehensive termination clause contact a lawyer who understands franchising or franchisingplus for assistance with upgrading the agreement.

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