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What could lead to a default on an operating agreement?

Owning a franchise means carefully abiding by the franchise agreement. If you or the other party defaults, it can lead to legal issues and the ending of the agreement.

You should follow the agreement exactly to avoid breaches, but sometimes breaches happen. The International Franchise Association explains franchise agreement breaches can be material, which is a monetary issue, or operational, which is where you fail to follow proper procedures.

Repeat breaches

Your franchise agreement may contain a repeated-breaches-provision. The other party may evoke this clause if you have multiple breaches over time. Many of the breaches may be minor issues that the other party did not act on or hold you responsible for. However, a good franchisor would issue you warnings to let you know you are in breach and how to correct it.

Minor breaches can occur easily and without intent on your part. You may forget to follow the right procedure for taking inventory or fail to pay a small royalty as you decide to hold it and pay it next time since it is not a large amount.

Money mistakes

It is possible that you could commit a monetary breach by not paying your royalties as indicated by the agreement. For example, if your agreement states you must pay on the first of every month, but the way you do your accounting, you are not ready to pay until the fifth of the month, the franchisor could hold you in default.

Operational issues

Operational issues are common because it is very easy to start doing things your own way once you own the business and see how it runs. For example, you may find a certain system is not efficient at your particular location, so you make changes and do it in a way you see as better. This is an operational breach because you are violating the agreement to follow a set system.

Breaches of a franchise agreement can be intentional, but many times, they are not. It is essential to know your agreement to avoid making a move that could land you in court.



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