Terminating franchise agreements

A franchise is a mutually beneficial business agreement, where the franchisor (for example, a large business such as McDonald’s) allows a franchisee to use its business idea. This means the franchisee can run a business selling the franchisor’s products. The franchisee uses the franchisor’s brand name, marketing and business format, and benefits from their training and overall expertise. The franchisor is usually paid a fee by the franchisee plus a percentage of sales revenue. Types of business that are often franchised include gyms, restaurants, clothes shops, mobile phone outlets, garages, and car showrooms. However, almost any viable business can be franchised.

Terminating a franchise agreement

If you are considering setting up a franchise agreement, you should seek independent legal advice beforehand, preferably from a solicitor accredited by the British Franchise Association. This will help you make sure you fully understand the terms of the agreement.

Each individual contract will be different, and will determine the exit strategy and the consequences of termination of the agreement for both parties.

A number of conditions for terminating the agreement are likely to be set out in the contract. These include, for example, that the franchisee is in breach of any of the terms of the agreement, persistently defaults in payments due to the franchisor, is found to have supplied false or misleading information in their franchise application, or goes into liquidation or bankruptcy, or becomes insolvent.

On the consequences of termination, the agreement is likely to include terms that the franchisee must stop using the franchisor’s trade name, not disclose any confidential information, and not compete with the franchisor.

Support

The British Franchise Association and the European Franchise Association both have a code of ethics, setting out acceptable standards of practice. They are available at www.thebfa.org.

Franchise agreements are complex, detailed contracts, which specify the grounds on which the contract will be terminated. Goodwill can break down, and ultimately it is only the terms of the agreement as specified in the contract that matter. It is therefore crucial to get the contract right before signing it. The contract will cover such circumstances as the death or poor health of the franchisee. It should set out what will happen if a franchisee wants to sell his business during the timespan of the franchise agreement, and the steps the franchisor will have to go through in order to terminate the contract.

Franchising as a mode of business is thriving in the UK, and in Europe. They are particularly attractive to people taking their first steps in business as they offer the back-up of a large organisation and the security of knowing that the business model works. According to research undertaken in 2006 by the British Franchise Association, there are more than 750 franchise operations in the UK and more than 350,000 people involved in franchising. The average turnover of a franchise business is more than £300,000, and more than 90 per cent claim to be profitable.

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