Deal with an unsuccessful franchise | Entrepreneurindia.in

Franchising is an easy way to expand your business where franchisees look to replicate your success. But what if they cannot?

Franchising is a great way to leverage your brand value if you wish to expand to new territories at a fast pace, with the surety that you preserve your business? core values. It also allows budding entrepreneurs to own a business with the confidence of an established brand and not of a complete newbie.

But, there may come a time when a particular franchisee fails or is unsuccessful; and in the best interest of your company, you may decide to discontinue. What constitutes failure is relative and is different for different businesses. The reasons to shut an unsuccessful franchise could be as follows:

(i) Dip in business
When a decision to open a franchise is done, a franchisor generally conducts a feasibility report on the potential of business from the area.

While a plunge in business can be temporary, a prolonged and sustained weak business can be a drag on the company. In such cases, the franchise may be tagged as unsuccessful.

(ii) Breach by franchisee
A situation where the franchisee does not follow the franchise agreement or works/functions contrary to it is termed as a breach of franchise. A franchising agreement is at the core of the contract, and when not adhered to can result in business losses and unsuccessful working.

(iii) Other grounds
There are other reasons which may render a franchisee unsuccessful. This may include aspects such as failing to enter into a lease or renewing of an expired lease, failing to obtain or renew the required insurances or licenses to operate, the franchisee becoming bankrupt, franchisee being convicted of a criminal case or civil offence, or conducting the business in a way that is detrimental to the company.

So what are your options as the franchisor and brand owner? How long should you wait? What is the worst-case scenario for you? We take a look.

Work it out
When the franchisor feels that his franchisee is going nowhere, he should reach out to the latter and have a chat.?For grounds like a dip in business, in most cases, helping the franchisee overcome the hurdle works best for both, the franchisor and the franchisee.

A lot of time has been invested in getting the franchisee up and running and it is always advisable to make the effort to rectify the problem/s.?Generally, a written communication should be made to the franchisee, giving him at least a 30-day period for course correction.

Mandatory and binding arbitration clause
If any of the disputes cannot be resolved amicably, the franchise agreement must provide for a clause under which concerned parties must mutually recognize and agree that it will be in their best interests to resolve their differences in a minimum time frame and money, and submit it to arbitration.

In such a case, the parties agree that they will not file any law suits or claims against each other without first submitting their grievances to mandatory and binding arbitration.

Terminating an agreement
Despite several attempts, if the franchisee is not able to and unwilling to correct the problems; and the franchisor feels there can be no going back on the agreement, terminating the franchisee agreement may be the only way out.

The reasons for the termination can be commercial factors like when the association is not commercially viable even after repeated attempts to improve the position, or the franchisee becoming bankrupt, or getting involved in any criminal activity.?It may also be the case that the franchisee, for some reason, wants to opt out of the agreement or does not want to renew it when it expires.

The last recourse
The decision to terminate a franchisee agreement should be the last recourse. Primarily, it always helps to have your lawyer go over all the documents and iron out any legal matters.Before the actual termination procedure starts, it would help if the franchisee was told about the decision to part ways and his side of the case heard, if needed.

Generally, every franchisee agreement contains a termination clause and the process contained in that clause is followed.Usually, the franchisor would serve a legal notice to the franchisee informing him about the termination of the agreement. Upon termination of this agreement for whatever the reason, the franchisee will cease to operate, conduct, exploit and use the services, intellectual property rights and trademarks?of the franchisor.

The franchisee will also deliver to the franchisor all the equipment supplied by him and is generally barred from entering the premise of the franchiser, where he was earlier allowed.?The franchisee will also deliver all the unsold stock of the products supplied.

In the event of breach of license terms, the franchiser will also have the right to transfer the license to some other party of his choice including the equipment and leasehold rights of the premises. There is also a forfeiture of non-refundable license/franchisee fee for the franchisee.

Non-Compete Clause
In order to protect the systems, trade secrets, customer lists and confidential business information and knowledge acquired by the franchisee, the franchisor should ideally invoke the non-compete clause.?This clause prohibits the franchisee from competing with the business in that territory for generally a period of 24 months from the date of termination of the agreement.

? Entrepreneur India November 2012

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