Managing Franchisee Defaults: A tailored Approach​

In every franchise system, the franchise agreement is the foundation of the relationship. This document establishes the core contractual obligations between franchisor and franchisee: brand standards, fees, operating requirements, territorial rights, and more.

But the franchise agreement rarely stands alone. Most systems also rely heavily on the operations manual—a dynamic set of guidelines and procedures that breathe life into the agreement. Together, these documents govern how the franchise business is run on a day-to-day basis.

When a franchisee fails to live up to those obligations, franchisors are faced with a difficult challenge: how to address the default in a way that protects the brand while balancing fairness and long-term objectives.

At Waldrop & Colvin, we help franchisors and franchisees navigate this sensitive process. Below, we outline the typical stages of addressing a franchisee default—and the legal and strategic factors that often come into play.

1. Informal Communication: Meetings and Calls ☎️

Many defaults begin with something simple: late royalty payments, missed reporting, or operational slippage (e.g., not following brand standards). In these cases, franchisors often start with an informal approach:

• A phone call from a field representative

• A routine check-in meeting

• A coaching session to encourage compliance

This stage is not just about “catching” problems—it’s about course correction. Informal communication can often prevent a minor issue from spiraling into a major dispute.

2. Written Warnings: Formal, But Not Yet Legal 📄

If issues persist, franchisors may escalate to a written warning. This is not a formal legal notice, but it is an important step.

A written warning typically:

• Identifies the specific defaults (missed payments, noncompliance with standards, etc.)

• References the relevant sections of the franchise agreement or operations manual if appropriate 

• Requests correction and next steps by a date certain 

• Serves as a clear record for the file

Think of this as a yellow card in soccer—serious enough to grab attention, but still short of ejection.

3. Notice of Breach with Opportunity to Cure ⏳

The next stage is the formal notice of breach (sometimes called a “default notice”). Under many franchise agreements—and in some states under applicable franchise laws—franchisees are given an opportunity to cure the breach.

For example:

• Paying overdue royalties within 10–30 days

• Correcting operational deficiencies within a set timeframe

• Submitting missing reports or records

This step is critical because it establishes a formal legal record. If litigation ever arises, courts or arbitrators will look closely at whether the franchisor provided adequate notice and a reasonable cure period.  These notices should be drafted by an attorney who has reviewed the franchise agreement and operations manual (if applicable).  

4. Notice of Termination ❌

If defaults remain uncured—or if the breach is so serious that cure is not possible (e.g., abandonment, unauthorized sale, trademark misuse)—the franchisor may issue a notice of termination.

This is the most serious action a franchisor can take. Termination ends the franchise relationship and triggers obligations such as:

• Ceasing use of the franchisor’s trademarks

• Returning confidential materials

• Complying with post-termination non-compete and de-identification requirements

Termination decisions are not made lightly. They impact not only the franchisee but also the brand’s reputation, other franchisees, and potential future investors. 

Careful franchisors should always consider – what is likely to occur after termination? 

Factors That Influence the Approach 🎯

Every case of franchisee default is different. Factors that often shape the decision-making process include:

• Franchise System Size & Maturity: Large, established systems may enforce compliance strictly to protect brand uniformity. Smaller or emerging systems may exercise more flexibility.

• Past Practice: How the franchisor has handled defaults with other franchisees in the past can influence what is reasonable or defensible now.

• Franchisee Relationship History: A long-standing, otherwise compliant franchisee may be given more leeway than a newer or consistently underperforming operator.

• Business Objectives: Strategic growth plans, market conditions, and competitive pressures may all factor into how aggressively defaults are pursued.

⚖️ Key Point: There is no “one-size-fits-all” approach. Each default must be analyzed in context, weighing both legal rights and business objectives.

When Disputes Escalate: Mediation, Arbitration, or Litigation 🏛️

Despite best efforts, some defaults escalate into full disputes. Depending on the franchise agreement, the parties may be required (or elect) to resolve disputes through:

• Mediation: A non-binding negotiation process facilitated by a neutral third party. Often used as a last attempt to resolve disputes before heavier litigation costs arise.

• Arbitration: A private, binding process where an arbitrator makes a final decision. Arbitration can be faster than court but still requires careful strategy.

• Litigation: Traditional court proceedings. While sometimes unavoidable, litigation is often the most expensive and public option.

These topics deserve deeper exploration, and we will cover franchise dispute resolution in a future series of blogs.

Final Thoughts 🖋️

Managing franchisee defaults requires a careful balance of legal precision and business judgment. The franchise agreement sets the rules, but real-world decisions often involve strategy, relationship management, and forward-looking thinking.

At Waldrop & Colvin, we guide franchisors and franchisees through this process—helping clients protect their rights, maintain brand integrity, and pursue the best possible outcome for the future.