Expiration or termination of a franchise agreement is a common course of action for every franchise business. Though franchising is undoubtedly a profitable venture for an entrepreneur to take up and an easy mode of owning a business under a well recognised brand name. However, it involves lot of complexities and legal issues. This is especially true when the franchise tenure is about to expire or when the franchise agreement is ceased or terminated. Cessation of the franchise agreement can be done by both the parties and is often done for the good. A franchisor ceases the agreement, if the franchisee fails to meet the desired expectations of the franchising business. While on the other hand, a franchisee opts for termination only if his/ her franchisor fails to comply with the written obligations. Under such circumstances, there is a lot of options available to the entrepreneur. The article gives you an insight of what a franchisee can do after the completion of his/her franchise tenure and how the franchisors can react to their decision of non-renewal.
With the termination of franchise agreement, a franchisee can have various options. One option might be is to have an independent business. Another option might be to take up another new franchise and finally one can head on for the renewal of the old franchise. So have you thought about the next step towards the franchise agreement tenure? Before we discuss about the legalities of non- renewal and termination of the franchise agreement, Let us find out the pros and cons of these options:
Pros and cons of an independent business
After running the franchise business successfully for many years together, franchisees many start thinking of establishing their own businesses in the similar industry by ceasing the franchise agreement during the renewal period. It can be a good idea by considering the fact that s/he has gained enough know-how of the business and the industry. The franchisee also has developed a good clientele base in that particular geographical area and it propel the business further. Still there are a number of factors that can trouble the independent operations of a former franchisee, these include:
- Unfamiliar brand
- Large investment and more risk of failure
- Lack of professional support and guidance
- Finding a trustworthy product source
- Winning the hearts of customers
Considering fresh franchise business
Taking-up a franchise substantially reduces the risk required in building the business (as against the independent business); yet hopping on another franchising brand will be equivalent to starting a business from ground level. Instead of renewing the franchise agreement, a franchisee may opt for the franchise of another franchising brand. But it involves many merits and demerits. This includes:
- The franchisee will seek more interest in establishing the new business concept; therefore, the chances for success will be more.
- Experience of running a franchised business will help him/ her in avoiding the mistakes s/he has made in the past.
- This time the franchisee will be more cautious about his/ her relation with the franchisor and will pay extra attention in building good relation with him/ her.
However, taking up another franchise business (after the expiry of the first one) will involve a number of problems also, which are:
- The franchisee needs to invest a good amount in signing-up with the company and re-building the infrastructure.
- S/ he has to start the business from the ground level.
- S/he needs to build a new clientele base, that usually takes time.
- S/he might experience difficulty in building a new network of distributors and suppliers.
Renewal of old franchise
This is one of the most viable options available, but there are drawbacks to it also.
Saturation point: Even after being a successful business for many years, a point of saturation can always creep in. Renewal of the old franchise might not bring in similar kind of profits.
Loss of interest: As the franchisee knows that it is an already successful franchise business, then he might have loss of interest and not take it seriously.
Franchisors speak
As the franchise agreement is heavily weighted towards the franchisor, therefore a franchisee is supposed to strictly follow certain obligations regarding the termination of the agreement. Let see what the franchisors have to say on this issue:
- Prohibition period: Many franchisors prohibit their franchisees to start a business in the similar field for a set of period. As Murli Mohan, VP, Global Learning Solutions, IIHT says, “If any of our franchisee cease the agreement after the expiration of the franchise tenure, then we forbid them for two years to open a similar business in the similar industry. It is necessary as we share the personal information of our business and also share our client base with them in order to ensure their proper franchise operations.”
- Penalty check: However, there are certain brands that do not pose any such ban on their ex-franchisee. Once they are out of the franchise network, they are independent and allowed to start any business on their own. According to A.S.Ganesh, MD, SMARTKiDZ, “Our franchisee can cease the agreement on mutual consent. Depending upon the reason of termination and the relationship with the franchisee, we decide the amount of franchise fee to that s/ he needs to pay before leaving the network. It depends completely on the relationship with the franchisees.”
- Genuine grounds for termination: Whereas, Rimy Oberoi, Founder, and Chief Learning Officer, Oyster Learning has a different view altogether. She says, “A franchisee never terminates the franchise agreement, if s/he is getting good value out of it. But the franchisor fails to ensure his/ her franchisees that s/he genuinely believes in their success and will offer every possible help to scale-up their business operations.”
So, if you are planning to abandon the franchise ship or switching over with a better one, a franchisee is always advised to consult hi/ her franchise attorney. Only then, the attorney can help you to switch over to the destination of your choice.
