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exit strategies for franchisees

Exit Strategies for Franchisees Part Two

By Newsletter

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:

  1. An acknowledgement by the franchisee that there is a breach of the Franchise Agreement; and
  2. A plan describing how the breach will be cured; and
  3. 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.

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Exit Strategies for Franchisees Before You Terminate

By Newsletter

There are times when it is more prudent to have an exit strategy in place than to employ the financial and manpower resources of your franchise company necessary for a franchisee termination. This is true from an economical standpoint as well as a legal one. Not only do many states have specific statutes dealing with termination spelling out what can and cannot be done but, believe it or not, some states require a franchisor to compensate the franchisee upon termination.

Considering the legal and economical consequences which flow from termination, it seems only logical to develop exit strategies to wean out the dissident franchisees and make room for those franchisees that are helping you build a successful franchise system.

So what should franchisors look for when determining potentially dissident franchisees? Without question the first clue is whether a franchisee is communicating with you. If a franchisee is not communicating with you, it doesn’t matter what kind of wonderful programs you have in place. Your franchise system will not work unilaterally.

There are several ways to keep the lines of communication open with franchisees. One method is to make sure your field personnel are aware of potential problems and have them meet face-to-face with the franchisee to discuss the problem(s). Only when you know what the problem is can you attempt to effect a practical solution through your exit strategies for franchisees.

If your field personnel cannot open the lines of communication, it may be prudent to have an executive pick up the phone and make contact. If you perceive a serious problem you may want to invite the franchisee for a visit. You may have to buy a plane ticket but it’s certainly less expensive than spending valuable executive time and money defending a lawsuit.

Occasionally a franchisor and franchisee need a third party to open the line of communication. Mediation sometimes works to get a franchisor and franchisee together and vent whatever animosity there may be while at the same time causing each side to get back to the problem.

A sometimes better method of encouraging communication is by using your franchise counsel. Recently, a franchise client forwarded a rather threatening letter from a franchisee’s counsel. Based upon the attorney’s letter, I realized he could not have reviewed his client’s franchise agreement. After picking up the phone and going over several key provisions of the franchise agreement, franchisee’s counsel realized his client’s vulnerable position and the expense his client would incur. Based upon our phone conversation, the line of communication opened and we were able to work out an exit strategy for the franchisee. But before an exit strategy could even be discussed, we had to communicate.

There are many great exit strategies for franchisees that work extremely well once you have found the root of a franchisee’s problem. Next month we will continue to build our arsenal of additional exit strategies for franchisees before termination.

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