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Who owns a franchisee’s business once the terms of the franchise agreement expires?
John Pratt writes:
If an agreement is not renewed, which would only happen if the franchise was not operating profitably, the post-termination obligations in the franchise agreement would apply.
Those obligations would prevent a franchisee from operating a competing business for a period of time and, of course, the franchisee would not be able to trade using the franchisor’s brand and know-how. In other words, the franchise business would stop and, therefore, would have no value.
The assets of the franchise business, including the premises, would generally still be owned by the franchisee, although most franchise agreements allow a franchisor, on termination or expiry, to take over the franchisee’s business assets. Usually, the price that’s payable to the franchisee is low because it takes no account of the goodwill value of the franchisee’s business.
Further, in retail franchises where the premises are important, very often franchisors have a deed of option that enables them, subject to obtaining the landlord’s consent, to take over the premises used by the franchisee.
In summary, franchisees still own their assets, but they’re not likely to have much value in view of the provisions of the franchise agreement.
John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.
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