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Franchising: Terminating The Franchise

What event acts as the flashpoint for litigating a franchise? Termination. Today, I want to comment on the process of termination.

My experience consists of the relationship between franchisor and franchisee declining till termination is the only alternative. More like the ending of a marriage than some may want to admit, the resulting situation has an emotional component on both sides of the franchisor/franchisee line. Heading off unnecessary litigation may require heeding the emotional state of the parties. On the other hand, the situation may dictate litigation.

Documenting the problems ought to have been the first step of both parties, but most definitely the franchisor's first step.

If not corrected, then go to the franchise agreement. Sending a written notice of the problems is generally the next step. Franchisees need to take heed of this notice.

At this point, both sides need to decide what they want from the business relationship. I think both need to understand one thing about their respective positions:

1. Franchisees: when all is done, the franchisor owns the system and trademarks.
2. Franchisors: a malfunctioning franchisee injures the whole system.

Now the parties must choose between staying together or splitting apart. Those parties seeing a benefit in remaining together will stay together but those seeing a lack of such a benefit will want the relationship to end. Another issues comes when a split looms: a peaceful split or not?

Legal counsel ought to give their respective sides the costs and benefits of staying together or not, and of fighting over the split or not.

Full post as published by Indiana Civil & Business Lawyer on February 05, 2008 (boomark / email).