Franchise frequently asked questions
If you have a query about franchising, you might find the
solution in one of our frequently asked questions below. If
however, the answer to your question is not there, please feel
free to contact us on efn@ffw.com.
What is franchising?
The General Concept
In simple terms it is the granting of certain rights by one
party (the franchisor)
to another (the franchisee) in return for a sum
of money. The franchisee then exercises those rights under the
guidance of the franchisor.
The consumer's perception should be that there is no difference
between one of the franchisor's corporate outlets and a franchised
one. The franchisor is licensing the franchisee the right to use
its business
format; hence the term 'business format franchising'. However
that right to use the business format is for a limited period of
time. The franchisee gains no interest in the actual ownership of
the format or the associated brand i.e. the trade marks. The rights
he enjoys are similar to those of a tenant when leasing a house.
During the period of the lease the tenant has full enjoyment of the
house, but the day after the expiry of the lease he has no rights
over the property at all.
The Commercial Bargain
In crude commercial terms the reason for both the franchisor and
franchisee entering into a contractual relationship with each other
is to make a profit. The franchisee makes a profit from supplying
the goods or services to the customer. The franchisor makes it from
allowing the franchisee to use its package of know-how and
intellectual property rights including the trade marks.
In order to be able to strike a bargain both parties must have
something to offer. The franchisor must have a proven business
format comprising continually developing know-how and methods of
operation and a package of intellectual property rights, the most
important ones of these being the trade marks. The franchisee must
have sufficient capital to invest in the franchise and be of
appropriate character and ability. Without the requisite "assets"
neither party can enter into the bargain.
Ironically however, as the franchisors' bargaining power grows
with the growth of the franchise network so does the chance of the
value of its package being eroded by existing franchisees or third
parties seeking to “piggyback” on to the franchisor’s goodwill. If
a franchisee starts to experiment on its own accord or a third
party attempts to copy the franchisor’s brand or business, the
goodwill in the franchise will suffer and decrease in value
accordingly. The franchisor must constantly police the franchise,
ensure that its standards are carefully maintained and that rogue
third parties are swiftly dealt with.
How can franchising be used to develop a business?
There are four basic ways in which franchising can be used:
(a) Creation of a new business specifically for
franchising
An entirely new product, service or
business offering can be created specifically for franchising. This
has been done with businesses such as Snappy Snaps in the UK, which
provides 1 hour film processing services and retails associated
products such as picture frames and the like in the high street.
Very often a local businessman identifies a successful franchised
concept in another market such as the USA, and decides to create a
similar concept in his own jurisdiction.
(b) Development of an existing
business
This is perhaps the most usual way of
evolving a franchise. An existing product or service is further
developed by use of the franchising method.
(c) Conversion of an existing business to a
franchise format
Sometimes an established business can decide to convert its managed
outlets to franchised outlets. Such decisions are usually taken
because of a desire to accelerate growth and reduce overheads
without sacrificing quality control.
(d) International Expansion
This is a very common method of introducing and growing a business
concept into new territories. The United States is the great
exporter of franchise concepts around the world. Brands such as
KFC, Holiday Inns, Hilton Hotels, Pizza Hut and McDonalds are all
American exports. Body Shop is an example of a British franchise
that has established itself around the world.
What are the advantages and disadvantages of franchising?
From the franchisee’s perspective
(i) The advantages
The franchisee is the
proprietor of its own business and owns the tangible assets of the
franchise outlet. What it does not own is the goodwill in the
business concept. Like any other business proprietor, the
franchisee buys materials, pays rent and staff salaries and takes
the profit of operation, less royalty and service fees. Subject to
various restrictions, it can sell its business when it wishes
(usually subject to the franchisor's pre-emption right and on
condition that the purchaser is approved by the franchisor. Please
see FAQ 17.) What makes a franchise business different from any
other business, is that the new franchise business gains from the
franchisor the entire business concept with full training,
assistance in every aspect of setting up and running the business,
and access to necessary materials and supplies.
In essence, it can be said that the franchisee does not have to
worry about what to do or how to do it, but merely follow the
developed concept. This should make failure less likely.
Obviously the franchisee’s start-up costs entail more than
paying the franchisor an up front fee: it must invest in premises,
fittings, equipment, materials and provide working capital until
the inward cash flow commences. In addition, it must make regular
payments to the franchisor in the form of royalties or management services
fees or, in some cases, an agreed mark-up on supplies obtained from
the franchisor.
(ii) The disadvantages
The franchisee is not
an independent entrepreneur. In the final analysis the franchisee
must follow the franchisor's instructions. The lower risk is
off-set by the lower reward for success.
From the franchisor’s perspective
(i) The advantages
Franchising allows the franchisor to increase its number of outlets
with minimum capital outlay and so accelerate the network's growth
and its profitability. Self-employed franchisees are generally more
highly motivated than salaried managers, and are more likely to
produce better results for less expenditure of capital on behalf of
the franchisor. Less staff will mean fewer personnel problems. As
the franchise network grows it will become easier to handle
national or regional customer accounts.
(ii) The disadvantage to the franchisor
The franchisor has to control and co-ordinate a network of
semi-independent businessmen and ensure that they build and
maintain a favourable image for the whole franchised operation.
This means that the franchisor's own role changes drastically.
The policing and monitoring of standards by the franchisor is
vital but can at times be difficult. The franchisor will sometimes
have to resort to the use of both carrot and stick to get
franchises to try new techniques or improve their current
performance.
The dynamics of the franchisor-franchisee relationship are such
that a lack of trust will on occasions creep in, making life more
difficult than it should be. This may be due to "personality"
clashes between the franchisee and members of the franchisor's team
or because the franchisee realises that he/she does not find it
easy to live within the restraints imposed by a franchise.
Conflicts between the franchisor's corporately owned outlets and
those owned by franchisees may occur. It is the franchisor's duty
to remove/minimise these conflicts and ensure that they are
satisfactorily dealt with.
An individual corporately owned outlet will be more profitable
for the franchisor than an individual franchised outlet (although
the increased number of franchised outlets will probably mean that
the franchised business as a whole will be more profitable than one
which is entirely corporately owned).
How is franchising different to other third party
relationships?
Franchising offers perhaps the best risk – control ratio out of
all methods of growth available to businesses. More
traditional ways of distributing goods or services, such as the
appointment of agents or distributors may reduce financial risk but
do not allow the principal to exert any real element of
control.
Mediums such as subsidiaries or joint ventures allow a higher
degree of control but involve a far greater degree of financial
risk.
Franchising allows a greater degree of control, especially over
the more important issues such as branding and methodology, while
substantially reducing the financial risk as it requires a lesser
investment of capital by the franchisor. This in turn enables a
higher rate of controlled growth as compared to more common forms
of corporate development.
How can a business be franchised?
STEP 1: Can the business work as a
franchise?
The subtleties of franchising take time to understand and not
all businesses can be successfully franchised. Any entrepreneur
must take a good, long, hard look at his business concept before
jumping head first into franchising. The failure of a franchise can
be disastrous not only for the franchisor but also for the
franchisees who have invested in it.
In order for a franchise to stand a chance of succeeding, the
basic concept must be a sound one, the franchisor must have
sufficient resources to support the chain and the franchisees must
be properly managed.
An idea cannot be franchised. In order to franchise a concept it
must first be proved to work as a business. The franchisee is
paying for the right to use a system that has proved to be
successful, not to put someone's bright idea into practice.
Business format franchising can be considered a
system leasing arrangement. The franchisee acquires from the
franchisor the licence to duplicate the franchisor's existing and
successful system of providing a product/service to the end user.
The potential franchisor must therefore ask itself whether or not
it has anything worth franchising. The right to sell a particular
product by itself is not a business format franchise. It is an
agency or distributorship which may well prove to be a profitable
business in its own right, but it is not a business format
franchise.
For a business to be franchiseable there must be definable
know-how, a distinct way of doing things that distinguishes the
business from others. Each element of the know-how taken by itself
may well not be unique: there are for example, only a limited
number of ways to grill a hamburger, fry chips and make a milk
shake. The combination of them, however, may be unique. When
coupled with the franchisor's name and trade marks the system
should be identifiable and distinctive. It is this that will create
the value of the franchise.
The know-how must be carefully identified and easily
communicable. Intensive training courses and an operations manual
will therefore be necessary. (Please see FAQ 8.) The potential
franchisor must ask itself whether or not the concept lends itself
to this.
STEP 2: The Legal Audit
Once the potential franchisor is satisfied that there is
definable, communicable know-how in the business, it must then
carry out a "legal audit" of its intellectual property rights and
make certain that the corner stone of the franchise - the name,
trade marks and other
intellectual property rights - do in fact belong to it. A
franchisor cannot grant its franchisees the right to use a name and
trade marks over which it does not have any proprietary rights.
STEP 3: The Pilot Operation
Once a concept has been developed and its name and marks
protected, it follows that it must be tried and tested in the
market through a pilot operation. This will further test its
profitability as a business for franchisees and allow the potential
franchisor to further refine the system on the back of further
practical experience. (Please see FAQ 9.)
STEP 4: Funding
Once the concept has been piloted, or indeed before, the
potential franchisor must decide upon how it will make money for
itself from the franchise business. Most banks will fund
respectable franchisors with sound concepts.
STEP 5: Legal Documentation
Before actively recruiting franchisees it is essential that good
quality legal documentation is prepared by a solicitor
knowledgeable of both the legal and commercial subtleties of
franchising.
STEP 6: Marketing the Opportunity
Once the franchise has been set up, the finances arranged and
the appropriate documentation prepared, it is of course important
to arrange the effective marketing of the franchise to franchisees.
The best franchises require the least marketing effort. Once
potential franchisees have seen outlets running and have had the
opportunity to speak to happy and successful existing franchisees
there will be little need to actively sell the franchises.
STEP 7: Running the Network
Finally, the potential franchisor must be aware that its own
role will change dramatically. It is no longer on the "sharp end"
of the business, working with customers on a day to day basis. It
should instead be continually developing and improving the system,
planning its strategic growth and monitoring the franchisees to
ensure that the high standards of the system and those associated
with the brand are being maintained. Failure to understand this
change of role will result in both franchisor and franchisees
experiencing unnecessary difficulties.
How should a franchise be structured?
When choosing a franchising structure for the market, the most
fundamental question that the prospective franchisor needs to ask
itself is "what do I aim to achieve by franchising?". Is it to earn
vast amounts of money by establishing the business across the
nation? Is it a defensive move to keep up with key competitors? Is
it to sell more products? Whatever the answer, it is likely to have
a significant effect upon both the wisdom of franchising and the
structure to be adopted. There is no right or wrong way to
structure a franchise. It will, at least in part, be determined by
the franchisor's available financial and other resources, the
product/service involved, and the relative importance of the
project to the franchisor.
The financial strength of the franchisor, or at least its access
to finance from its bankers and possibly from government agencies,
will be one of the most important issues for it to consider. The
cost of entering into a series of regional franchises, although not
inconsiderable is likely to be considerably less than pursuing the
unit franchise approach to the market. In practice, a mixed
approach is probably the most appropriate, with the franchisor
developing those regions in which it already has a presence or,
which, for various reasons, it deems to be desirable for it to
exploit, and regional franchises being granted for other areas.
Should franchisors conduct an audit of its Intellectual
Property (trade names, logos, trade marks etc.)?
A legal audit must be completed so that both parties know what
key intellectual property rights are being licensed. Please
see Step two of “How can a business be franchised”.
Please see Our Services section for further information on
Trade Mark Protection.
Do franchisors need to have their know how and methods of
operations in written format? i.e. do they need an Operations
Manual?
The Operations Manual is the embodiment of the know how of the
franchise. Ultimately, it is what the franchisee is paying to see
and use. It therefore is of paramount importance that the
franchisor invests in creating and developing an Operations Manual
that captures all operational aspects of the business.
The Operations
Manual should identify the core franchise system know how and
enable franchisees to use the know how and any trade secrets. The
Operations Manual will also provide copyright protection for the
franchisor to the way in which the know how is expressed.
There is no set format for a Operations Manual. Some franchisors
have multiple volumes - each addressing different aspects of the
franchised business - ranging from marketing through to accounting
and the shop layout. Franchisor’s are increasingly converting their
Operations Manuals into electronic format and making it available
to franchisee’s via a secure page on their intranet pages.
If you require assistance in preparing an Operations Manual,
please see Our Services section.
Prior to entering into the franchise relationship should the
franchisor run a pilot franchise operation?
Before launching a new franchised concept it is vital that a
number of so-called "pilot operations" are
established to help ensure that the franchise business constitutes
a viable business for both franchisor and franchisee. Although much
will depend upon the individual market circumstances, these pilot
operations should generally be for at least twelve months to
establish their viability. Even if the franchisor has had corporate
outlets up and running for many years, if they are not exactly the
same as the proposed franchised outlets (for example, they have a
different product mix, or are turning a concept that has
historically been shop based into a mobile, van based environment)
a pilot operation should be run to ensure that the new business is
viable. After all, the franchisor is selling a proven business blue
print to the franchisees. If it is not truly proven, what is the
franchisor selling?
In practice, pilot operations have been found not only to prove
the viability of the business but also to identify potential
problems and provide solutions to them, in areas such as
product/service type offered, marketing/promotional methods used,
management systems, opening-hours, training and support required,
shop lay out and so on.
Once the concept has been proved by the pilots, it is essential
that the franchisor continues running them. They provide both an
excellent "barometer" of the franchisees' business and a useful
"laboratory" where new product ranges, management and sales
techniques and so on can be tested.
How can franchisors select good franchisees?
There is general consensus amongst franchisors that the
recruitment of good developers, master franchisees and
franchisees is the most
difficult and most important aspect of franchising a business. It
can easily be a case of "marry in haste, repent at leisure". The
relationship between a franchisor and its developer, master
franchisee or unit franchisee is a long term one. Both parties have
invested time and money in it. Neither has complete control over
the other. If there is a problem it can be long, drawn out and
acrimonious.
There is no perfect answer to recruiting the right franchisee
and franchisors use a large variety of techniques ranging from
psychometric testing to a basic "gut feel". However, there are some
basic points that can usually be taken on board by new franchisors
in their recruitment practices:
- The most common mistake made by new franchisors is to be in
such a hurry to recruit the first few franchisees that, they
compromise upon the criteria that they have decided upon for their
ideal franchisee profile. Obviously the ideal franchisee profile
needs to be realistic and flexible to a degree but it should not be
totally ignored as soon as a potential franchisee with money to
invest walks through the door.
- It is not unknown for new franchisors to give their first few
franchisees "sweetheart" or "honeymoon" deals. It is acceptable to
recognise the great degree of risk that the first few franchisees
take by investing in the franchise, but it is a mistake to give too
good a deal as there are likely to be the cause of friction between
the franchisor and later franchisees in the future.
- It is important that the franchisors know where the franchisee
get its funding from and the terms of any repayment, so that he can
be satisfied that the franchisee’s personal circumstances do not
make the franchise an untenable business proposition.
- Most people have a "comfort zone", a level of income above
which they are not sufficiently motivated to increase the turnover
and profitability of their business. The franchisor should try to
identify whether or not a franchisee's individual comfort zone is
too low for the particular franchise.
- If a potential franchisee is too entrepreneurial this can cause
substantial problems for the franchisor. A real entrepreneur will
find the disciplines of franchising far too strict and conflict
with the franchisor is inevitable. Energy and drive is essential in
a franchisee, but so is the ability to work within a system - a
quality which few entrepreneurs possess.
What information should a franchisor request from the
franchisee?
The type of information franchisors should request from
potential franchisees and indeed master franchisees and developer
may include:
- details of the type of business(es) operated by the master/
developer/franchisee as the case may be
- details of parent, subsidiary and group companies
- its financial records, its accounts, balance sheets, loans,
what assets it has, both movable and immovable and any charges on
them, types of creditors, details of bankruptcy/insolvency if it
was ever faced with it
- amount of capital it has and is able to outlay for the
franchise operation
- details on its directors, officers, shareholders and
employees
- access to a skilled/unskilled work force (including recruitment
policy, training and operational standards)
- ability to expand the business
- types of services offered, in terms of marketing, advertising,
distribution of goods, management skills and its ability to obtain
all the clearances from authorities to set up the franchise
business or outlet
- litigation history, if any
What information should a franchisor give to a prospective
franchisee?
A number of European jurisdictions have franchise specific and
non-franchise specific pre-contractual disclosure laws. For further
information, please see our franchising disclosure table [insert
link to Vicky Reinhardt’s table for EfN website].
The type of information that franchisors may have to disclose
includes:
- type of business, its corporate structure including whether it
is a part of a group of companies or one company
- business experience of the franchisor and its directors and
officers domestically and internationally
- type of franchise business format, product line etc
- its accounts and financial status, along with information on
any loans, charges on its assets, creditors, details, and any
bankruptcy/insolvency proceedings it has been involved in including
directors and personnel involved
- litigation it has been involved in, both in civil and criminal
law
- reputation of its brand name or goodwill and any public figure
who may be associated with it
- funds to be paid to the franchisor by franchisees e.g
royalties, technical fees, lump sum payments, recurring fees that
would be required
- obligations to purchase on the part of the franchisees, such as
raw materials from the franchisor for goods in question, products,
equipment, real estate, services of the franchisor, signs, fixtures
etc
- restrictions on sale, tie-in and buy-back arrangements by the
franchisor of the franchisee’s business
- training programmes offered by the franchisor and level of
supervision involved
- site selection and design of the outlet, to what extent it
needs the approval of the franchisor
- what requirements are there for the renewal of the
franchise agreement?
- what sorts of activities or breaches would result in
termination of the franchise contract
Prior to entering into the franchise relationship should a
franchisor seek to legally protect any confidential information it
discloses and/or take a deposit from a potential franchisee?
Almost as soon as a dialogue has been established between a
franchisor and a potential franchisee, there will be an exchange of
information between the parties. The franchisee will want to
know as much as possible about the business so it can formulate
financial projections and the franchisor will want to carry out due
diligence on the franchisee.
It is vital that the franchisor enters into a confidentiality
agreement with a potential franchisee before it discloses any
substantial and sensitive information about its business
format. Often, franchisors receive a large number of requests
from potential franchisees. Some of these will be serious and
others spurious. The franchisor should consider requesting
payment of a deposit by the franchisee to ensure they are serious
about taking a franchise. The deposit will cover the
franchisor’s management time and any travel and subsistence costs
and will be set off against any upfront fee should the negotiations
result in a signed franchise contract.
What fees can be charged for a franchise?
The fees charged by a franchisor should reflect the commercial
bargain between the two parties. Care should be taken that
the franchise remains financially viable for the franchisee and
that any upfront fees do not inadvertently starve the franchise of
much needed start-up capital investment. Typical fees
include:
- Development Fee or Exclusivity Fee – an
upfront fee typically in consideration for granting to the
franchisee territorial exclusivity
- Store Opening Fee – an upfront fee payable on
opening each franchised outlet
- Service Fee – a percentage of gross turnover,
usually payable monthly over the term of the relationship
- Mark up on products and equipment supplied by
the franchisor to the franchisee
- Marketing Fee – usually expressed as a
percentage of gross turnover, this is a contribution to any local,
regional or international marketing campaigns that the franchisor
will run and that will also benefit the franchisee’s
business. In addition, the franchisee may be required to
commit to a minimum spend on its own local marketing campaigns
- Training Fee – an amount charged from time to
time by the franchisor for training the franchisee to operate the
business and provide ongoing assistance and support.
Are franchisees required generally to give financial guarantees
(either individual or corporate) in respect of their financial
obligations?
Before granting a franchise, the franchisor should ensure that
it has carried out a thorough due diligence of the franchisee and
has seen and approved a business plan for the franchise
operation. The franchisee will be committing to certain
performance targets and the franchisor’s business will rely on the
prompt payment of fees and royalties.
The franchisor should request that the franchisee nominates a
guarantor (either an individual or corporate entity) to “stand
behind” the franchisee and underwrite its payment obligations under
the contract.
In the event that the franchisee defaults on payments and/or
becomes insolvent, the guarantor will be legally obliged to pay the
franchisor what it is owed under the franchise contract.
In the event that the franchisor is also supplying goods to the
franchisee, it is advisable to think carefully about payment and
credit terms and whether a stand by letter of credit should be
placed against all orders received from the franchisee.
Should key individuals of the franchisee’s business enter into
an Undertaking of Confidentiality and Non-competition?
When entering an overseas market, no matter which approach is
taken, the franchisor is extremely vulnerable. Today's partners can
very easily be tomorrow's competitors. In such circumstances
protecting intellectual property rights will not be enough - the
franchisor should also ensure that the secrecy of any know-how is
protected and that sub-franchisors, master franchisees, developers,
franchisees and their employees are not free to compete with the
franchisor either during or after the term of the franchise
agreement.
Confidentiality
A franchisor will be forced to disclose a considerable amount of
confidential information to each of its master
franchisees/developers/franchisees and they in turn will have to
disclose some of that information to their employees. The
franchisor therefore needs to make quite sure that it has done all
that it possibly can to prevent these parties from disclosing the
confidential information and/or using it to compete with the
franchisor.
One method is for the franchisor to receive a direct
confidentiality and non-competition undertaking from each of its
master franchisees/developers and franchisees. These must agree
that they in turn will obtain similar undertakings from their
employees and enforce those undertakings if required to do so.
Once an employee has left, he may not disclose any genuinely
confidential information which he might have obtained while
working. In practice, this is a very difficult rule to enforce. It
may be hard to prove that any employee is using secret information
or disclosing it to others.
In any event, the courts have to be convinced that the
information which has been disclosed is genuinely secret. Merely
labelling something as 'secret' will not do. For example, it is no
use labelling a recipe as a secret recipe if the ingredient list
and the method is set out in a poster which is on the wall of the
franchise restaurant's kitchen, particularly if members of the
public can easily read it from the restaurant area. It would be
hard to convince a court that it was a genuine secret if thousands
of employees knew it. At some stage, a court will decide that the
matter is no longer secret and has become public knowledge and not
through the fault of the franchisee.
Non-competition
Due to the difficulty of showing that secrets are genuine and
that they have been disclosed, franchisors frequently attempt to
get round the problem by putting in specific non-competition
clauses. That is to say, clauses which oblige the franchisee not to
operate a competing system within a certain period after the
termination of the franchise agreement or within a certain radius.
The enforceability of such clauses varies greatly.
Great care has to be taken drafting a restrictive covenant because, if
it is drafted too widely, the court will refuse to enforce the
whole covenant.
For example, a restriction on operating a competing restaurant
within a one mile radius of an existing restaurant might well be
reasonable in a small town but may be unreasonable in central Rome.
A restriction might well be reasonable if it could be shown that it
was almost certain that trade secrets were being used in order to
operate the competing business.
Rather than a non-competition clause, which the courts do not
like, a franchisor may be able to achieve similar ends by
prohibiting former franchisees and their employees from poaching
customers and from enticing former staff colleagues. The object is
to prevent the former franchisees or ex-employees from using their
personal influence over customers or employees to the disadvantage
of the franchisor. This type of restriction may be particularly
useful if the former franchisee is to be allowed to continue to
exploit the franchise in a limited territory rather than a full
scale termination. There must, however, be a legitimate reason for
restricting competition. It would not be reasonable to restrict an
employee from contacting old customers when, in his old job, he had
no contact with customers anyway.
Protection of confidential information and both in term and
post-term restrictions on competition, are issues that the
franchisor must consider very carefully before finalising the form
of a franchise or development/master agreement. Local laws may
greatly restrict the scope and enforceability of such clauses and
it is therefore essential that timely advice is taken from
experienced local lawyers.
Are franchisees generally allowed a right to sell their
business?
The franchisor must always be in complete control of the
franchise network and be able to choose its master franchisees,
developers and franchisees, at its complete
discretion. This means that the franchise agreement must always
give the franchisor the right to veto the sale of a master
franchisee's, developer's or franchisee’s business to an unapproved
third party.
The franchisor has the ultimate decision on who can join the
system and he will be concerned that the new party is the right
person for the franchise. The franchisor must always assess the
financial status of the potential purchaser and its ability to pay
any remaining balance of the franchise fees. It should also
consider whether the purchaser is compatible with the image of the
franchise system.
The agreement should contain detailed provisions on sale of the
master franchisee’s/developer’s/franchisee’s business which must
always be followed. These provisions should be carefully thought
through and usually contain pre-emption rights giving the
franchisor the right of first refusal to buy the business. It
should also lay down time limits within which these rights can be
exercised. It is not uncommon for the franchisor to be entitled to
a percentage of any price paid by a third party purchaser, either
as a recognition of its rights over the franchisee's goodwill, or
as a finder's fee if it locates a purchaser.
It may even be that the franchisor wishes to 'buy-back' the
territory concerned and exercise any pre-emption rights it holds,
in which case it may be appropriate for it to obtain a discount on
the open market price.
How can a franchise contract be terminated?
Franchisors should take specialist legal advice, in each country
belonging to the international franchise system, on the
consequences of termination of the franchise contract. The
franchisor must establish whether franchisees will be protected by,
for example, local distributor or commercial agent legislation.
Such legislation will often establish significant termination
rights for the franchisee if it is held to be a distributor/agent.
The legislation will often take precedent over the terms of the
franchise agreement thereby rendering the contract provisions for
termination procedures and rights irrelevant. Legislation may apply
even on a refusal to renew a limited duration fixed term franchise
agreement on its normal expiration date.
The consequences for a franchisor terminating the contract of a
franchisee who is protected by local legislation must always be
very carefully considered before deciding upon termination as an
appropriate course of action.
The local legislation will usually define the nature of 'just
cause' for termination. Certain conduct will nearly always qualify
as just cause:
(a) commission of a serious crime such as fraud;
(b) bankruptcy/insolvency;
(c) gross negligence of the local party causing substantial
damage to the franchisor's interest; and
(d) breach of a fundamental provision of the contract, for
example, a franchisee's refusal to render any accounts or pay
any royalties at all to the franchisor.