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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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Before You Terminate

By Newsletter

Your patience is exhausted. You have done everything in your power to help your unappreciative franchisee. You may have even suggested the best course might be to sell the franchise and you would be willing to refer your franchisee leads for his/her territory. The franchisee still will not comply with his or her franchise agreement. Perhaps the franchisee is the type that believes their way is better than yours and their conduct is starting to have a detrimental effect on your franchise system. Whatever the reason, you have reached a point of no return for this particular franchisee and believe he or she must be expunged from the franchise system.

What should you know and do before making the decision to terminate? The starting point for termination is to look at your Franchise Agreement and determine the conduct of your franchisee that constitutes a default and grounds for termination. Next, determine if you have adequate documentation to prove the violation. If you are terminating for a reason other than a standard violation (for example, failure to meet sales requirements) consult us; there are special rules which apply and careful contract drafting is essential. Review all of your contractual obligations to make sure you have fully complied with your side of the bargain; for example, if you are providing a product, has it always been timely supplied? Also, review what your prior course of dealing has been with other similarly situated franchisees. You may have modified your contractual rights. Believe it or not, there are states that permit written agreements to be modified without a subsequent writing even if the contract provides otherwise.  Be prepared for your franchisee’s argument that the covenant of good faith and fair dealing requires uniform treatment and he or she is being singled out.

Make sure you are familiar with applicable state franchise protection statutes. There are at least 17 states that require a type of good cause for termination and/or an opportunity to cure. Keep in mind that many states ignore contractual choice of law provisions if that state franchise law would otherwise be circumvented. Some states, like Texas, have a Deceptive Trade Practices Act holding the franchisor liable for certain business conduct.

Make sure you have not given your franchisee any arguments that assist him or her in claiming you have caused a defacto termination because you are in violation of the agreement or that you are actually terminating the franchisee as a penalty for his or her refusal to participate in illegal activity; for example, an unlawful tying or price fixing scheme in violation of antitrust law and “little FTC Acts.”

The main point I want to stress is the importance of knowing how to build your file before termination. Correctly done, the integrity of your franchise system will be preserved.

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