Why franchise termination will always be part of our industry

Even in the very best franchises it’s occasionally necessary for the franchisor to terminate a franchisee who isn’t operating their business correctly.

Termination can be effected in two ways. First, the franchisor can elect not to renew a franchisee at the end of the term of the franchise agreement. This will usually be every five years. The franchisor obviously has to show good reasons for the decision because most franchise agreements contain the presumption of a right to renew on the part of the franchisee.

The second method of termination is during the term of the agreement. This nuclear option is obviously the last resort and before such drastic action is taken a professional and ethical franchisor will need to have exhausted every other possibility. These will include identifying the problem areas, advising, guiding, re-training, mentoring and allowing time to improve. Nevertheless, all this sometimes fails to correct the problem and when that point is reached the franchisor must be brave enough to take positive action and carry out the termination. This is in spite of the fact it’s likely to have negative as well as positive consequences.

The positives that can come from a termination are that a seriously under-performing franchisee can in time be replaced with someone who will follow the franchise model properly and try harder. If the terminated franchisee is bringing the brand into disrepute it will send a positive signal to the rest of the network. If they’ve failed to follow safety procedures it can protect the franchisor from a corporate legal prosecution or, in a worst case scenario, even a corporate manslaughter charge. If a badly performing franchisee is continually undermining the efforts of the franchisor to develop and grow the business, it’s generally better they cease to be a part of the business. Removing a constant troublemaker is almost always positive for any business.

Unfortunately, some of the negative consequences of a termination can be serious. If they are so minded, franchisees who have been terminated have a variety of ways in which they may retaliate. These include taking legal action, which is made easier by the numerous ambulance-chasing lawyers who operate in the franchising industry. In a worst-case scenario, this could trigger a class action involving other franchisees. Lesser damaging retaliatory action can come in the form of adverse social media. Sometimes lots of it and for a long time. This can be very damaging for trading and also for the recruitment of new franchisees.

Thankfully in well-run franchises, terminations are infrequent. The success of each franchise is a common goal shared by both sides but unfortunately the reality is that some franchisor-franchisee partnerships will break down. For that reason terminations will, regrettably, always remain part of our industry.