Signing a franchise agreement creates a business partnership, and a franchisee must stick closely to the contract or become at risk for a breach that could lead to litigation. A breach could also lead the franchisor to close down the business if it is significant enough.
According to Franchise.com, here are some reasons that a franchisor may terminate the franchise contract.
1. Insolvency
If the franchisee is not able to pay for the inventory, rent and fees to keep the business running, the franchisor may decide to close it. A franchisee who is struggling should talk about the issues with the franchisor and try to find some resolution to the lack of success before falling far behind financially. If no resolution is possible, terminating the contract and closing the store may be the best option for both parties.
2. Abandonment
A franchisee who abandons the business will lose the contract and the business, of course. He or she may also face a breach of contract suit if the franchisor can show the breach caused the parent company financial loss.
3. Failure to pay fees
Franchisees must pay fees to the parent company, and if payments fall behind, the franchisor is sure to take some kind of action. If the problem is ongoing, the result may be termination of the contract.
4. Repudiatory breach
A franchisor may take the franchisee to court to end the agreement if the franchisee has engaged in illegal behavior such as fraud or another crime. The court would then determine whether it is serious enough to constitute a repudiatory breach that would allow the franchisor to end the contract.
If the parent company does not fulfill its part of the contract, the franchisee may also have the right to end the contract or seek financial reparations in court.
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