Termination and Renewal of Franchise Agreements: Effective Strategies for Indian Markets
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A franchise agreement generally contains a clause for the duration of the period for which the franchise shall continue. The time period is decided and fixed by the franchisor and franchisee before the initiation of the franchise, and it can also be made during its subsistence. Although the agreement can be terminated before the time decided if both the parties agree to end it because of several reasons, such as poor performance, breach of the agreement, not complying with the quality standards or laws of the nation, or some personal issues. However, it can be renewed as well, depending on various circumstances, such as the potential to expand and become more profitable in future or to celebrate the achievements. But before renewing or terminating any franchise agreement, the franchisor and franchisee have to comply with certain conditions in relation to it.
Some of the terms and conditions which are to be kept in mind while terminating the agreement are as follows:
• Regular performance reviews and feedback should be taken to determine whether or not the franchise qualifies for renewal.
• Upon renewal of the franchise agreement, the terms related to franchise fees, territory rights, and operational guidelines shall have to be renegotiated.
• Both the franchisor and franchisee shall ensure that the renewal agreement complies with the updated legal requirements and regulatory changes. For this purpose, the parties can engage a legal expert with a specialization in franchise matters.
• The renewal of an agreement is generally made upon meeting certain performance metrics like sales targets, profitability, market share, and customer satisfaction scores.
• The franchisee shall have complied with the franchisor’s operational standards and shall continue to adhere to them after the renewal of the agreement.
• Proper documentation of the renewal agreement shall be made.
Some of the terms and conditions which are to be kept in mind while terminating the agreement are as follows:
• After the expiration of the period fixed by the franchisor and franchisee, it is at the option of the franchisor that if he chooses not to continue to franchise with a particular franchisee, he can simply terminate the agreement, and the franchisee cannot prevent this termination.
• While the agreement is still in continuity, or even after the expiration of the period mentioned in the initial agreement, if both the franchisor and franchisee mutually agree to terminate the agreement, the same can be done.
• The franchise agreement shall clearly outline the breaches through specific clauses which would lead to termination of the agreement.
• If the franchisee fails to comply with any regulations or local or national laws, the franchisor may, on such grounds, terminate the franchise agreement.
• If the franchisee fails to meet the standards of quality, fails to pay any requisite fees, or operates outside the designated territory, the franchise agreement can be terminated.
• Sometimes the franchise agreement consists of the fulfilment of targets set, and fulfilment of such targets within a specified period can lead to termination of the agreement.
• If the franchisee declares bankruptcy or becomes insolvent, then, in order to safeguard the brand and ensure business continuity, the franchisor reserves the right to terminate the agreement.
Ending a franchise is an equally complicated task as opening a new franchise. The franchisor and franchisee both have to perform certain activities to completely end the franchise agreement.
Following are some insights and strategies which the franchisor must opt for to effectively prepare for and handle the end of a franchise term:
• Before the expiration of the term of franchise, communicate and have discussions about the future prospects of the franchise with the franchisee that whether he elects to continue the franchise or terminate it after the term expires.
• Consistently assess the performance of the franchisees and provide feedback based on the performance. This will ensure timely completion of the targets and resolution of the disputes, if any.
• Ensure that all legal documents, agreements, and other standards are up-to-date and timely updated so that everything be ready at the end of the term for either termination or renewal of the franchise agreement.
• If the current franchisee is not to be renewed, then proper closure plans and transition plans should be created and informed beforehand so as to avoid any dispute at the last moment.
• Keep providing requisite training and proper resources to the franchisee and its staff so that they meet the renewal criteria and succeed in their business.
Now, following are some insights and strategies which the franchisee must opt for to effectively prepare for and handle the end of a franchise term:
• Not only the franchisor, but the franchisee shall also maintain with itself the detailed records of performance metrics and ensure that those records match the standards prescribed by the franchisor.
• The franchisee shall maintain a certain portion of the profits, which shall be utilized for meeting necessary expenditures, including renovation costs, purchasing new equipment or machinery, or increased franchisee fee.
• Engage a legal consultant to understand the outcomes of the termination or renewal clauses and ensure that a balanced decision is finalized.
• Analyse the market reputation of the franchisee to understand whether it is beneficial to continue the franchise or terminate it at a particular time.
• Make effective communication with the franchisor so as to discuss the franchise’s current and future performances, concerns, and potential for renewal.
• Be prepared to engage in negotiations for the renewal terms, aiming for a mutually beneficial agreement that supports continued success.
• Stay updated with the trends in the market and keep on making innovations to enlarge the customer base and enhance business performance.
• The feedback received from the franchisor shall be acknowledged quickly, and necessary changes, if suggested, shall be made for smooth operational activities in the franchise.
These were some of the strategies that, if followed timely, could benefit the smooth operation of the franchise and smooth termination as well.
At last, let us discuss some practices which are to be followed by the parties during negotiations for the renewal of terms and mitigating potential conflicts:
• Openly communicate about the performances of the franchise and make suggestions or requests if needed for improvement of the operations.
• The franchisor shall transparently communicate its expectations to the franchisee, and in return, the franchisee shall make its best efforts to timely meet the targets and fulfil the expectations.
• Schedule regular meetings for discussing the plans and resolving the problems, if any.
• Ensure that every clause in the agreement is explained in a crystal-clear manner and explained properly to the other party. The terms and conditions shall also be clearly documented in the agreement to avoid any misunderstanding with the help of legal counsel.
• Mention the incentives upon achieving the set performance targets and the penalties in case of delay or failure to achieve those targets on time.
• To resolve the disputes, the resolution methods shall be communicated beforehand. Out-of-court settlement methods like arbitration or mediation be preferred, which ensures protection of the identity of the brand value.
• Market surveys be regularly conducted to understand the tastes and preferences of the customer.
• Proper breakdown shall be done regarding all the costs associated with the renewal, such as fees or required upgrades.
By understanding and applying these practices, both franchisors and franchisees can effectively manage the franchise agreement termination or renewal, ensuring a smoother transition and continued business prosperity.
Authored by: Adv. Anant Sharma & Sahil Arora
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