Reference no: EM13920716

Franchise Termination Legislation

Both contracting parties voluntarily included termination agreements in franchise con- tracts, presumably because they increased the value of the contract, net of the costs of the clause. Franchisees pay less for franchises with these clauses because there is a chance they would be terminated. Franchisers presumably were willing to receive less from the franchisee when these clauses were included because it gave the franchiser flexibility to change the ownership structure of the stores if future conditions warrant such changes. If both parties to the contract are intelligent, rational parties, they "priced" such termination clauses in the contract. Such clauses on net created value. The government passing laws restricting such voluntary agreements reduces the value of new franchises. They result in wealth transfers from the franchiser, who paid for these termination provisions in terms of lower franchise fees, to the franchisee.