The Real Cost of your Franchise Agreement Not Being Renewed
As a mediator, I am often involved in disputes between franchisors and franchisees and get to hear the legal and non-legal problems and concerns that arise when a franchise agreement is terminated or the franchisor exercises the right not to renew the agreement. Under the Franchise Code, mediation is a required step when such issues arise.
Sometimes there is genuine effort on the part of franchisors to address all of the issues and achieve a fair and amicable outcome but in other cases, franchisors are indifferent to the plight of the franchisee and just want to walk away from the partnership as quickly as they can.
I always meet privately and separately with the franchisor and the franchisee as well as their respective legal representatives to understand the different perspectives. I am often told how the franchisor expects the franchisee to simply ‘move on’ after the end date of the Franchise Agreement and how the franchisee expects the franchisor to help him or her through the process of winding up the franchise.
Both parties reassure me they have authority to negotiate, but not unlimited in the case of the franchisor, and that they are attending with genuine bone fides to avoid litigation and move on. But how does it usually play out? On the face of it, the Franchise Agreement is usually stock standard with regards to the ‘End of Franchise Agreement’ clause. These usually indicate that the franchisor is under no obligation to renew the Agreement, that reasons do not need to be provided for the termination of an agreement and that any capital expense should be outlaid by the franchisee during the contract period.
Notice is given with caution in accordance with the Franchise Agreement, the shop doors shut and the business ends. Simple! However, is that really how the franchisors expect the winding up of the business to end?
During the joint session of a mediation it is not uncommon for the non-legal concerns to bubble over, for example, what happens to staff and their entitlements? What about the plant and equipment, the old stock, the storage of records? Not to mention the loyalty and assistance, financial or otherwise, that the franchisee has demonstrated to the franchisor over the years or the potential loss of a family home that was mortgaged to raise the capital to invest in the business as equity and as part of the business succession plan.
Some franchisees are lucky to have franchisors who provide career counselling for employees but even these don’t usually consider contributing a cent to the costs involved in shutting the doors of the business, especially if the required notice has been provided.
Even the most profitable of businesses in the best locations are not entirely immune to having the rug pulled from under them by the franchisor, especially when it is done in accordance with the Franchise Agreement.
So, what are the pain points for franchisors?
The risk of bad media publicity, lawyers’ fees, down-time, stress and the hassle of it all. However, these are not dissimilar to the issues faced by franchisees, who, in many cases, are even less likely to find the money for litigation costs. They usually also don’t have the time or energy to take on the franchisor in the final days of the business and why would they spend the time and money on fighting anyway? The franchisee’s lawyers usually don’t see a cause of action and will advise against litigation because the legal grounds to claim some form of compensation simply aren’t there.
Therefore, as a franchisee, it makes sense to:
- Keep your business options open - always.
- Know what is valuable about your business from the franchisor’s perspective. Offer it to them or other parties to buy before the ‘notice-not to-renew’ is given.
- Keep notes of every conversation, promise made or reason given between you and the franchisor.
- Never believe that the end won’t come.
- Understand that you need to be as smart as the franchisor, business to business.
- Accept that no-one is indispensable.
- Run your business as though you’ll get the notice that your Franchise Agreement is not going to be renewed tomorrow.
Alison Shaw is a Lawyer and CEO of national mediation firm SHAW Mediation Australia. SHAW Mediation offers voluntary mediation opportunities to everyone for all types of disputes anywhere, anytime for fixed scaled fees.
Alison and her national team of mediators are all nationally accredited, qualified in mediation and law, complying with ongoing professional development. Committed to the ethos and the guidelines of the Mediation Standards of the Mediation Standards Board, Shaw Mediation has experience in resolving franchise lease and commercial disputes without courts anywhere, anytime for fixed scaled fees.
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