From a business point of view, a franchisee agreement is a great opportunity for growth and collaboration. It allows the franchisor to expand its influence and enter new markets, and the franchisee can start a business with an established brand, reducing the risks associated with starting a new project.
However, all collaborations have an expiration date, and a franchise agreement is no exception. Most contracts are set for a fixed term; as the term approaches its end, both parties must decide whether to renew or terminate the agreement.
A franchise lawyer Miami can help navigate the complexities of this scenario by offering expert legal guidance throughout the process to better understand your case in order to make informed decisions. They can assist with contract reviews, negotiations, and dispute resolutions, ensuring that you are well-prepared for renewal or termination.
Meanwhile, we encourage you to keep reading to learn more about what franchise terminations and renewals entail, as well as the reasons behind them.
What is the purpose of a franchise agreement?
A franchise is a business model in which the owner (franchisor) grants an individual (franchisee) the rights to use and profit from their brand, products, services, business system and marketing strategies in exchange for an initial franchise fee and ongoing royalties based on revenue or another agreed-upon metric.
This, together with other considerations, is outlined within a contract or franchise agreement whose sole purpose is to establish a legal framework where the terms and conditions of their business relationship are detailed in order to minimize any misunderstanding or dispute.
Elements in franchise agreements
A franchise agreement typically includes:
- Rights and restrictions when using the franchisor’s branding.
- Details about the financial and performance obligations of all parties involved.
- Requirements for training and support.
- Provision for dispute resolutions.
- Renewal terms including the duration of the franchise relationship and the conditions that must be met for renewal.
- Termination conditions.
Being specific about the terms of the contract as the franchisor will help you protect your business reputation and ensure uniformity across your franchise network. But if you are the franchisee, it is equally important to thoroughly understand and negotiate the terms of the contract to safeguard your interest. To learn more about the topic, we recommend you review our previous article: 5 essential clauses in franchise agreements your attorney should review.
What happens when a franchisee agreement ends?
A franchise agreement is a guarantee that a commitment has been established, but it does not mean that it will be permanent; most agreements have an agreed-upon duration ranging from 5 to 20 years in some cases.
If the conditions are met at the end of this term, the agreement may be renewed or extended with the assistance of a legal professional like a franchise attorney. This expert can help navigate the renewal process by reviewing the new contract and negotiating the inclusion of additional clauses that benefit both the franchisor and the franchisee.
Difference between termination and non-renewal
Now, if the renewal conditions do not meet the franchisor’s expectations, there are two courses of action that occur: a non-renewal or a termination. Both signify the end of the business relationship between the franchisor and franchisee, but there is a significant difference.
Termination takes place when the franchise agreement is ended before its scheduled expiration. In contrast, non-renewal occurs when the agreement naturally reaches its expiration date, and the franchisor chooses not to renew due to less abrupt causes previously established in the agreement, such as underperformance or failure to reach sales targets.
Reason for early termination of a franchise agreement
If a franchisor wants to terminate the agreement, it’s usually because of wrongdoing on the part of the franchisee. Here we give you three general reasons why a franchise owner may pursue termination:
1.- Breach of contract
When a franchisor enters a partnership, they trust that the franchisee will honor the agreements they have made and protect the reputation of their business as if it were their own. Failing to complete this task is one of the ways in which a breach of contract can occur.
By neglecting to follow the franchisor’s established operational procedures, misusing the brand’s intellectual property or engaging in legal and damaging actions like fraudulent accounting or violating health and safety regulations, a franchisee can severely harm the franchisor’s reputation and business.
Such actions not only breach the terms of the franchise agreements but also risk legal consequences for both parties. So, in hopes of protecting their company, the owner would choose for an immediate termination of the agreement and may seek compensation for damages caused to the brand.
2.- Failure to meet performance standards
In a franchise agreement, it’s common to outline specific performance metrics that franchisees must meet. Target sales, customer service quality and operational efficiency, for example, are factors monitored through regular evaluations and assessments.
Based on the conditions established, the franchisor may decide not to extend the agreement if they believe that the expected performance has not been met; this is in the case of non-renewal. However, if failure to meet the standards is consistent, an early termination will be initiated.
3.- Market changes
Although less common compared to performance or noncompliance-related issues. Market changes can be reason enough for the termination of a franchise agreement. Say, for example, a shift in consumer demand; if there is a significant change, a franchise may no longer be viable in a particular region.
That does not mean that the franchisee’s work is inadequate or unsatisfactory, but rather that external factors have made the business unprofitable. In this situation, the early end of the agreement must be decided by both parties in an effort to protect them from long-term losses. This may include the presence of a franchise attorney Miami to negotiate terms for compensation or assistance in transitioning the franchisee to a more suitable region.
Consequences of terminating a franchise agreement
Unlike termination, non-renewal typically follows a more structured process, with both parties having time to prepare for the conclusion of their business relationship. On the other hand, termination is often more abrupt due to the development of more serious issues.
However, terminations can still follow a defined process, especially if outlined in the franchise agreement. This process typically includes formal termination notices and the opportunity for the franchisee to address or correct the issues before the agreement is fully terminated.
A lack of reason or notice for the termination can lead to legal disputes, as franchisees may argue claims of wrongful termination and consequently seek resolution through litigation. To avoid such conflicts, the involvement of franchise lawyers and commercial litigation lawyers is essential. For more information, feel free to contact us or review our blog.
