Making an early exit: Can you leave a franchise before the end of the term?

22/07/2018 18:00 | Start a business

Leaving a franchise early

Generally, the franchise agreement establishes how long your arrangement with the franchisor will last, and you'll be expected to fulfil these contractual obligations. However, in some cases, you may wish to terminate the contract before the term is up. Here, we take a look at five different ways this can be achieved.

The franchise agreement

When it comes to leaving a franchise before the agreed term is over, the franchise agreement is your go-to document. As the most important legal document in the franchise process, the franchise agreement is the document which you'll need to reference to find out what the consequences of specific choices and actions will be. Not only does it establish the initial length of the franchise term, but it also sets out possible paths of action and the ramifications should you pursue each of them. This means that any franchisee considering leaving the franchise early should carefully analyse the franchise agreement for relevant information.

Five ways you can leave a franchise early

Generally, there are five accepted ways in which the franchise arrangement can come to an end early. While certain contracts may have other exit routes written into them, these five are found in most agreements. However, different contracts are likely to attach different conditions to each of these options. Consequently, a close reading of the franchise contract is essential.

1. Franchise resales

One of the more popular ways to exit your arrangement early is a franchise resale. The vast majority of franchises will agree to a franchise resale under certain conditions. In most cases, the existing franchisee will need to find a new franchisee to sell to and organise the particulars of the sale. However, the franchisor does have control over several aspects of this process. For instance, they may levy a transfer fee, retain the right to veto the resale if theyre not content with the arrangement, or refuse to consent to a sale in the first place. Selling a franchise is the best way to exit the arrangement and realise the value in your franchise, but it's not always as smooth and straightforward as you would think.

2. Franchisor goes out of business

If the franchisor goes out of business, the ramifications can be enormous. Typically, the insolvency process is long, complicated, and varies wildly from one situation to the next. However, there are a couple of considerations that apply to most cases and which you need to be aware of. They include;

  • Lease agreements In some cases, the franchisor has a financial interest in the property youre leasing. This can cause problems should they go out of business. In such a case, its necessary to take legal advice, then contact the owner of the premises to see if an agreement to continue operating can be reached.
  • Brand rights Having exited the franchise agreement by default (i.e. the franchisor is no longer trading), you may want to continue running your business in its current form. If so, specific arrangements regarding brand rights will need to be made.
  • Suppliers If a franchisor goes out of business but still has financial obligations to fulfil, new arrangements with suppliers will need to be made. Similarly, outstanding debts to banks, lenders, and other businesses will also need to be considered.

When a franchisor goes out of business, it's essential that you take informed legal advice from a franchise specialist. This can be a messy process, and franchisees need trustworthy, talented advisors around them if youre to navigate these challenges safely.

3. Mutual agreement

Another way in which the franchise term can come to an early end is by mutual agreement. This occurs when both parties the franchisor and franchisee agree that the relationship should be terminated. In some cases, the franchisor will buy back the franchise unit, though not always. Its also unlikely that youll realise as much value in the business as you would by selling to a third party. When considering ending a franchise contract by mutual agreement, its necessary to consider a number of factors;

  • Are there any outstanding financial obligations you need to pay off?
  • Can the lease on your business premises be transferred to the franchisor?
  • Do you need to transfer any arrangements with suppliers?

4. Problems with the property lease

In some cases, its possible to exit a franchise agreement when specific issues arise with your property lease. If the premises are damaged or become unusable, discussions will need to be held with the franchisor. Similarly, if the length of the lease is less than that of the franchise agreement and there is no way of renewing it, a decision will have to be made. Generally, efforts will be made to find new premises. However, if this isnt possible, the two parties may decide to end the franchise agreement early. In this situation, what happens next will largely be determined by the details of the franchise contract.

5. The franchisee defaults

Franchisees can default if theyre not able to, or dont want to, abide by the terms of the franchise agreement. This is possibly the worst outcome for the franchisee as, in most cases, they will be liable for the losses accrued by the franchisor. This is often an expensive and damaging way to exit an agreement and should be avoided at all costs.

As you can see, there are many franchise options open to those who want to terminate their arrangement before the end of the agreed term. However, some will leave you in a far better position than others, and some should be avoided altogether. When leaving a franchise agreement, it's vital that you try to go out on your terms and not be forced out. A mutual agreement or franchise resale is probably the best means of achieving this. However, in all situations, compromise and communication will play an integral role in the process.

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