Economically it is good business to have a program in place to help franchisees exit the system without having to resort to litigation or arbitration. An exit plan allows you the Franchisor to control the process and bring in a new energetic franchisee who can follow your franchise system, pay royalties, become successful and be a shining example for future prospects.
As a Franchisor, you are already set up to take in new leads, so why not use some of those leads for obtaining that super star replacement franchisee. Wouldn’t it be a great turnaround to go from having a non-performing or non-compliant franchisee to have a new franchisee who is much more motivated and desirous of pleasing you, the Franchisor? Some Franchisors even have programs in place which provide credits toward future royalties or a credit toward the purchase price to employees of franchisor interested in owning a franchise. It’s a great incentive to attract good corporate employees to work for your Franchise company when they can later become successful franchisees.
From the Franchisee’s point of view, it makes sense to present their franchise in the best possible light to facilitate the sale of their business to a third party. Because the Franchisor has controlled the process, the Franchisor has created a win-win for both the Franchisor and the franchisee.
Another form of exit strategy which ultimately reaches the sale of the franchise is the Cure Agreement. This agreement can be as simple as:
- An acknowledgement by the franchisee that there is a breach of the Franchise Agreement; and
- A plan describing how the breach will be cured; and
- The consequences of failing to follow the plan and cure the breach.
The use of a Cure Agreement if structured correctly can be a powerful tool for the Franchisor. The details of what the defaulting franchisee must do should be fully set out. Further, if done correctly the Franchisor in many states can incorporate release language, eliminating a franchisee’s claims (if any) against the Franchisor. Also there is no lag time. If the franchisee fails to cure the breach (particularly a monetary breach) the exit plan to remove the franchisee is in place and implemented immediately. The Cure Agreement is definitely a weapon that should be in a Franchisor’s arsenal.
As a Franchisor, it is imperative that you develop strategies to deal with franchisees that don’t perform or worse, refuse to abide by your agreement. With the proper plan in place you can avoid the cost of arbitration or litigation and move quickly to prevent any collateral damage with other franchisees.