Not every franchise agreement lasts for the full term set out in the agreement. If you are a franchisee who would like to terminate your franchise agreement, the first thing you should do is look at the franchise agreement itself. This will provide guidance on the circumstances under which you can end the agreement. You should think carefully about whether you want to end the agreement because it can be costly. You may have to pay an exit fee (or you could be exposed to being sued for damages).

Here are the ways that franchisees may end their agreement early.

Cooling off period

If you are a franchisee, you have seven days after you signed the franchise agreement or paid non-refundable money to the franchisor to end the agreement. Terminate the agreement within this time and you have wisely used your ‘get out of jail free card’.

Agreement allows it

If of course the agreement allows early termination then as a franchisee you can get out of the agreement that way. Unfortunately not many franchise agreements allow franchisees to end the agreement early.

elling the franchise

Another way to get out of a franchise agreement early is to sell the franchise. The franchise agreement should set out conditions for selling the franchise business. Not all franchise agreements allow the franchisee to sell. However if the agreement does allow the franchisee to sell, they have to seek written permission from the franchisor before selling. The franchisor has 42 days to respond and they cannot unreasonably refuse a request. This could be a valid way for getting out of your franchise agreement early.

Franchisor becomes insolvent or sells the company

If the franchisor becomes insolvent or sells the company, generally the franchisee does not have an immediate right to terminate the agreement. If the company becomes insolvent, a liquidator will be appointed who has the power to enforce the agreement. If the company is sold, the franchisee is still bound to the agreement except that the agreement is with a different party.

However if the franchisor becomes insolvent, it may be difficult for them to meet their obligations under the agreement. Now if a franchisor can’t meet its obligations under the franchise agreement then the franchisor is in breach of the franchise agreement. Where the franchisor is in breach then this may give a franchisee a right to terminate the agreement.

For example, if the franchisor holds the lease over the franchisee’s business premises, but because the franchisor goes into liquidation this may automatically terminate the lease, and if the lease is terminated then the franchisee may not be able to continue occupying the premises.

Another example could be that the franchisor, being in liquidation with cash flow concerns, may not be able to supply stock or provide business support to the franchisee. This could be a breach of the agreement which could allow the franchisee to terminate.

Three things for franchisees to consider

If you are a franchisee and you are considering ending your franchise agreement to start another similar business, you need to do your due research and make sure you aren’t breaching the franchise agreement.

Here are three things for you to consider:

  1. Make sure you’re not infringing on the franchisor’s intellectual property. This includes trademarks, patents and copyright. For example, logos, equipment, patented products, uniforms, business layout and paint colours.
  2. Does the franchise agreement contain a restraint of trade clause? If it does, you may have difficulty setting up the same or a similar business under a new name in the same location or close by.
  3. Does the franchise agreement contain a non-solicitation clause? If there is a non-solicitation clause, you may not be able to approach your franchise customers about your new business. Which means it could be hard to get it off the ground.

These are just some tips we have come across over the years that could be helpful. Every franchise agreement is unique. If you need yours reviewed we can help.

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