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What happens when a franchisee violates their agreement?

On Behalf of | Jul 3, 2023 | Uncategorized |

Before a franchisor does business with a possible partner, they both have to accept the terms of a franchise agreement. The agreement protects the business while providing the partner rights to use its trademarks and do business under its name. But if franchisees disregard the terms of the agreement, it could hurt the business’ reputation.

Common breaches by franchisees

Franchise agreements are legal documents that contain the obligations of both parties and possible penalties for not meeting those obligations. A contract breach occurs when one party does not abide by the terms of the agreement. If the agreement says so, a franchisor may terminate a franchisee who fails to meet the standards outlined in the franchise’s operations manual.

Below are a few examples of franchisee material breach of contract:

  • Obtaining products from sources other than the franchisor
  • Operating a company that directly competes with the franchise
  • Disregards or misuses the franchisor’s trademarks and branding
  • Carrying out franchise operations outside of approved locations
  • Neglecting to pay royalties and franchise fees
  • Leaking confidential information about the franchise

Before a franchisor can end an agreement contract with a franchisee, the franchisor must first issue a breach notice, providing the franchisee an opportunity to correct the breach of contract. If the franchisee is still unable to correct the breach, the agreement may be terminated.

Growing a business presents numerous obstacles for entrepreneurs. Hardheaded franchisees are just one example. However, it may be difficult to terminate a franchisee who is not aligned with the company’s goals unless there has been a severe violation of the contract. A franchise attorney can offer advice on how to terminate the contract legally.