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Divorcing a Franchisee

Nov 24th 2010 at 7:51 AM

The final installment in the "Successful Franchising" series.

What Does it Mean to Divorce a Franchisee?

Divorce is the action of removing a Franchisee from, or asking the Franchisee to leave. the franchise system. There are three ways in which the Franchisee can leave or be removed from the system:

  1. Transfer the Franchise to another qualified franchise prospect. This can be done while the Franchisee operates the location or by the Franchisor sending in a management team to manage the location until a qualified Franchisee is found.
  2. Close the location down through court action.
  3. Allow the Franchisee to continue operating independently from the location using a different brand not associated with the franchise system. This is not recommended.

Image: graur codrin /

Transfer of the Franchise

This is the preferred method of removing a non-system Franchisee from the franchise system, because the Franchisor controls the process.

  • The Franchisee pays for the ads, advertising that the franchise business is for sale.
  • The calls from the ads and any other leads are taken by the Franchisor.
  • The Franchisor processes the candidates as it would any candidate for an unopened location, using the same recruitment criteria.
  • A key problem that Franchisors face is the pricing of the franchise business. Most Franchisees will overvalue their business. For this reason, it is a good practice to enlist the services of an outside third party firm that specializes in valuing companies, to determine a value on the franchise business.

Ideally the recruitment process can be done while the Franchisee is still managing the business, however, there will be times when the relationship has deteriorated to the point where the Franchisee's presence will be a deterrent to both the transfer of the franchise business and to the system as a whole. When this occurs, the Franchisor is faced with two possible actions:

  1. Place a manager in the location and manage the business until a suitable transfer candidate is found. In this case, the costs of the manager would be paid for from the gross sales of the location. Any losses would come out of the price paid by the transferee for the business. Any profits would go to the Franchisee.
  2. Close the location. This option will result in legal action being taken by the Franchisee. Before doing so, BE SURE that your documentation is strong enough to support this action.

Closing the Location

There may be occasions when the operation of the location by the Franchisee is so detrimental to the franchise system that the Franchisor must take immediate injunctive action to force the closure of the location. Be prepared for the following:

  • Thorough disclosure of all documentation justifying the need to close the location. It will be helpful if you can prove that the Franchisee is negatively affecting the reputation of the Franchisor and the franchise system, and that other Franchisees are suffering financially as a result.
  • A legal challenge by the Franchisee to prevent the closure. This will add to your legal bills. However, if you have properly documented the problems you will be given the injunction. It has to be black and white, however, with no grey areas, otherwise the injunction will not be granted.

As part of the injunction you will also file a suit for damages which may include:

  • Loss of royalty revenue due to the location being closed.
  • Payment of royalty revenue in arrears, as by this time the Franchisee will have stopped paying royalties.
  • All costs of the legal action which the Franchisor is forced to take.

It is NOT TRUE that the courts take the side of the Franchisee because of the David & Goliath syndrome. The courts always look at fair dealings. So if the Franchisor has been fair in all of its dealings with the Franchisee and the Franchisee has not been fair in its dealings with the Franchisor, then the courts will find in favour of the Franchisor.

Allowing the Franchisee to Operate as an Independent

This is never recommended. If the Franchisor allows this to happen, it will mean the destruction of the franchise system. At no time should this be considered as a viable option.

Please to comment
Dec 21st 2010 at 9:32 AM by megadox
Thanks for the kind words.
Dec 21st 2010 at 9:25 AM by gerardoantonio

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