Franchising 101: Can You Terminate a Franchise Agreement Early?
Franchises are complex business models and it can take a while to get your head around all the technicalities surrounding it. So, letís learn more about the franchise agreement Ė and whether the contractís timeframe is set in stone.
Entering a franchise agreement is a huge step, and one that demands a significant amount of time, work and energy. So, itís inevitable that some people find it difficult to sustain the momentum to carry on driving the business forward. If you find yourself in this situation, you may want to find out how you can terminate your franchise agreement before the contract term is up.
What is the franchise agreement?
First of all, letís look at the franchise agreement in more detail.
Itís a legal document that outlines the responsibilities and obligations of each party and the compensation they can expect to receive if things go wrong. By signing the franchise agreement, the franchisee agrees to manage their own branch of the business in accordance with the specified franchise model and pay ongoing fees and royalties to the franchisor. In return, the franchisor might agree to provide training and support in key areas such as business operations and marketing.
A typical franchise agreement lasts for a fixed term of five or more years, with the option to extend it once itís finished. The longevity of the franchise is in the best interest of both the franchisor and the franchisee but, from time to time, one party will request the termination of the agreement.
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The franchise agreement is particularly important because there are no laws governing the world of franchising. That means franchisees should turn to the franchise agreement as their first port of call to confirm any queries. For this reason, the agreement usually provides plenty of information, covering every aspect of the franchising process, from set-up to termination.
To read more about the franchise agreement, read our definitions page here.
Can you terminate a franchise agreement early?
Yes, you can. As a general rule, franchisees should make every effort to fulfil their obligations as set out in the franchise agreement, managing the business until the end of the specified contract term. But sometimes this isnít possible.
Although ending the agreement early might seem like a drastic measure, itís counter-effective for franchisors to keep franchisees in the business when they donít want to be there. If theyíre not enthusiastic about their work and committed to pushing the brand forward, itís likely the franchise unit will suffer, with negative implications for the company as a whole.
Every new business involves risk, so itís worth considering what will happen if your franchise is not successful. Letís take a look at some of the situations in which you might end a franchise agreement early and what you can do.
When might you want to terminate the franchise agreement?
1. When the franchisee breaches the contract
Because the franchise agreement has been drawn up by the franchisor, itís usually weighted in their favour and designed to make sure they have the power to end the agreement if certain obligations are not fulfilled by the franchisee.
The franchisor can terminate the agreement if the franchisee breaches it. This could happen if the franchisee:
- Doesnít adhere to the franchisorís business standards or stipulations
- Doesnít have the right licences or permits
- Doesnít keep up royalty or marketing payments
- Goes bankrupt
- Commits a crime
If any of these situations occur, the franchisor must give the franchisee notice so they have the chance to resolve the issue and prevent termination, according to the British Franchise Associationís Code of Ethics. If the issue is not resolved, the franchisor can initiate court proceedings to recover any money the franchisee owes them Ė either in the form of franchise fees or monetary damages.
On the other hand, the franchisee can breach the contract by terminating it early. In this case, the remuneration should cover the loss of profit from which the franchisor would otherwise have benefitted.
2. When the franchisor breaches the contract
If a franchisee wants to end the franchise agreement, they should make sure they can justify the termination by demonstrating that an important clause has been breached by the franchisor. This is possible if the franchisor:
- Doesnít provide the level of training and ongoing support mentioned in the franchise agreement
- Doesnít take measures to protect the franchiseeís business or territory
- Commits fraud
- Goes bankrupt
Simply becoming tired of all the hard work or dissatisfied with the franchise unitís performance probably wonít be accepted as a reasonable excuse by the franchisor. Thatís why itís so important to make sure youíre making the right decision when you sign a franchise agreement.
3. When the franchisee wants to sell the franchise unit
The time might come when the franchisee wants to sell their unit so they can retire or pursue other interests. Usually, the franchise agreement will outline the franchise resale process and how it should run. But the franchisor has the right of first refusal to buy the unit at the same price and on the same terms as new franchisees.
If a new franchisee is brought into the equation, itís unlikely they will pick up where the previous franchisee left off. Instead, the existing franchise agreement is terminated and a new contract is drawn up. In this case, the previous franchisee will pay a transfer fee while the new franchisee pays the standard franchise fee.
What happens when you reach the end of the franchise agreement term?
If the franchisee reaches the end of their fixed term without having breached any of the regulations, the agreement will terminate. At this point, the franchisee can choose either to walk away or renew the contract. If they would like to renew the agreement, franchisees are usually required to give notice of renewal to the franchisor before the first contract expires. Or, the franchisee could also renew the agreement by signing a new franchise agreement on the same terms as the existing one.
>> Read more:
- Franchisor and Franchisee: The Importance of a Strong Relationship
- Franchise relationship management: 5 key ways to manage it
- Tips on Managing Conflict
- How to develop an effective relationship with your franchisor
- How to deal with franchise conflicts
- 5 Tips for Avoiding Franchise Conflict
- How to Develop a Strong Franchisor and Franchisee Relationship
How can I ensure I make the right decisions?
Franchise agreements are legal documents and should always be treated with caution. Signing, altering or terminating them will have significant consequences. By agreeing to terminate the franchise agreement, the franchisor loses the franchiseeís income and it could damage their reputation.
Whatís more, the wrongful termination of a franchise agreement could constitute a breach of contract. If this happens, either party could be faced with substantial liability claims and be forced to pay damages. Therefore, any action must not be taken lightly.
The rules surrounding franchise terminations can be confusing. So, it can be helpful to seek specialist advice from an experienced franchise solicitor before taking steps to terminate the agreement Ė whether youíre a franchisee or a franchisor. This will minimise the risk of incurring monetary penalties and damaging your reputation.
The British Franchise Association (BFA) is a great resource if you want to find a qualified franchise expert. Take a look at its Members Directory to find accredited franchise solicitors.
Or visit our dictionary page to learn more about the franchise world.
Alice Tuffery, Point Franchise ©
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