The End of a Franchise Agreement
Franchise agreements are both a popular way for a business to expand into new regions, and a popular way for someone to start owning their own business. The idea is that the franchisor has already set up a successful business model, including methods of running the business and a strong brand. In exchange for payment of a fee, the franchisee gains access to all of this know-how and goodwill, and the support of the franchisor. The franchise may also include access to cost saving mechanisms such as collective purchasing agreements with suppliers providing the same stock to all franchisees, often at a reduced rate.
Unfortunately, sometimes a franchise relationship will deteriorate, leaving either the franchisor or franchisee to want to get out of the arrangement. Where both parties have a mutual desire to terminate the relationship, it is usually possible to negotiate agreed terms for the franchisee to exit the agreement. However, this is not always the case, and our specialist in intellectual property disputes, Virginia Nichols, has recently had to advise clients on both sides of failing franchise relationships. Here are some tips for each side to consider.
Franchisor wishing to terminate
It is unusual for the franchisor to have the ability to simply terminate a franchise agreement at will. Most franchise agreements will set out a number of obligations on the franchisee, including the payment of agreed fees, reporting on turnover and other business metrics, compliance with applicable laws (such as being a good employer), and obligations relating to preserving the value and the goodwill of the brand, and not bringing the franchise into disrepute.
The franchise agreement may specify that some types of breach are grounds for immediate termination, for example if the franchisee goes into liquidation. However, if grounds for instant termination cannot be made out, it is usually necessary to notify the franchisee of the details of the breach, and put them on notice that they need to remedy the breach within a specified period of time. Because some of the obligations on a franchisee can be a bit vague, it is important to be precise about what the franchisee has one wrong, and what steps they need to take to come back into compliance. Then, if they fail to meet those clearly specified requirements, the agreement can be terminated.
It is important to communicate clearly with your franchisee as soon as you become aware that a breach has taken place. If you delay, it can be more difficult to bring them back into compliance if they have formed a false expectation that this behaviour is acceptable.
In difficult economic times, it is important to communicate with franchisees, in case any variations to the agreement are required. If the franchisees start failing, this can be detrimental to the brand. Recent cases have also highlighted the damage that can be done to a brand when franchisees breach employment laws relating to working conditions and minimum wage requirements.
Clear communications with franchisees and prompt action are the recommended strategy for addressing any franchisee breach.
Franchisees who want out
It is important to recognise that most franchisee agreements are very deliberately aimed at protecting the franchisor and it can be extremely difficult for a franchisee to exit a franchise agreement. Franchise agreements generally place very few ongoing obligations on franchisors.
It is important to know that a franchisee cannot simply choose to cancel the franchise agreement and rebrand their business. There is a consistent theme in recent Court decisions upholding the ability of franchisors to enforce restraint of trade clauses against former franchisees who have sought to carry on a similar business after the end of a franchise agreement. This difficulty particularly arises where the franchisee wishes to carry on trading from the same premises.
It is important to identify why you want to exit the franchise, and what you want to do next. You should check whether this will be allowed under the terms of the franchise agreement or whether it is necessary to enter into a serious negotiation with the franchisor regarding the terms of a mutually agreeable exit.
Whether you are buying into a franchise, or setting up to franchise your own business model, it is important to consider at the outset what might happen if things go wrong in the future. Our Commercial Law team can assist with setting up various business models, including franchises, licences, joint ventures, and related group companies.