Can a Franchisee Terminate a Franchise Agreement?

Schuyler "Rocky" Reidel

Schuyler "Rocky" Reidel

Schuyler is the founder and managing attorney for Reidel Law Firm.

Reidellawfirm.com | Can a Franchisee Terminate a Franchise Agreement?

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Most franchise agreements yield positive results. For both a franchisee and franchisor.

But as with any business relationship, there may arise a need to terminate the contract. Don’t worry, it happens.

We’ll outline the two common ways this occurs and offer advice on ending it peacefully. That’s surely what you want.

Keep reading to remove any anxiety over your termination clause.

How to Terminate the Franchise Agreement

Because it’s a legally binding contract, you want to handle the process correctly. As a franchisee, you want to uphold your reputation at the conclusion of affairs.

Our aim is to make this a reality.

By doing so, you can entertain another franchise opportunity later if you determine its merit.

You have the mind of an entrepreneur after all. And dreaming big is what you excel at.

Terminating With Franchisor and Franchisee Consent

Maybe the franchisor has also agreed that termination is the best course. Mutual consent is the ideal situation.

The main reason is that signing documentation should happen in a reasonable time. Allowing both parties to feel good.

They want to get back to business. So do you.

Agreeing on all the requirements is the first step. To terminate the agreement, you need to tie up loose ends.

Provision for meeting obligations:

  • Pay any outstanding royalties
  • Transfer assets to a similar business

Depending on when you move in this direction, you may owe fees that must be settled. Negotiation in this area might be possible, but only if you have a long-standing relationship.

If you don’t have credibility with your franchisor, think about pursuing other ideas.

Other franchisees may also want to expand their business by purchasing yours.

Dealings with a third party will happen after everything is in writing. For now, we just want you to notice this as a part of the whole.

Draft a new agreement with your franchisor explicitly stating this shared consent. Signing cements a smooth and friendly separation.

Reasons for a More Immediate Termination

“Termination for cause” is the less than ideal situation. Initiated either by you or the franchisor, it is a breakdown in partnership.

State law may vary, but there are general criteria that must be met.

Justifications for this split:

  1. Abandonment of franchise
  2. Material breach of contract
  3. Fraud

The franchise owner may terminate your agreement in any of these cases.

Or if you as the franchisee fail to receive promises made under the original franchise agreement, you can initiate the proceedings.

Examples:

  • Lack of support or mentorship
  • Unreasonable changes to your contract
  • Marketing fund abuse
  • Criminal action by the franchisor

In either case, each party should weigh the potential fallout before the agreement is terminated. An experienced franchise lawyer should also be consulted.

We stress this because any legal proceeding will require that you pay to proceed. And a drawn-out dispute could negatively affect your future profitability.

Your other options are arbitration or mediation.

Next, we’ll assist in educating you on how to peacefully end franchise relationships.

Ways to Comply With the Terms of Franchisors

Your franchisor more than likely included a termination clause in your contract. It covers more than the owed royalties.

This section will lay out what the franchisor and franchisee must do to fully sever the partnership. It’s a good idea to review this portion of your agreement before making a decision.

And it’s even better to have a franchise attorney interpret its nuances.

Suspend Performance Over a Reasonable Period

If you breached the contract, the clause may give you anywhere from a couple of days to months for rectifying it.

Financial difficulties happen. So, this provides an opportunity to sell more. Instead of needing to close shop immediately.

Breaches include:

  • Missing payment on fees
  • Not following the operations manual
  • Changing store hours without consent

However, there are times when the franchisor doesn’t need to provide notice. Or time to resolve the issues.

Deal breakers:

  • Ongoing inability to repay fees to the owner
  • Endangering public safety or health
  • Bankruptcy of your franchise

We sincerely hope none of these apply to your case. But even if they do, a competent franchise lawyer is still an asset.

The Covid years. High inflation. Changing consumer trends.

Any one, or all of these factors may have contributed to your struggles.

Ultimately, the franchisor is seeking to protect his brand from negative press. But a material breach shouldn’t evoke unfair punishment.

Should they still decide to terminate your franchise agreement, you can smooth out your exit.

Good Faith Towards Your Franchisor’s Intellectual Property

One of the major purposes behind the clause is to safeguard their trade secrets. Proprietary information like a revolutionary way of operating falls under this.

Extending the life of a franchise system requires two key points in the agreement:

  1. Assurances of your non-competition
  2. Low restrictions on your pursuing other ventures

Some franchise agreements include stipulations that you won’t open a similar business near other franchisees. You can probably guess why this is important to list.

But you can still use the experience you’ve accrued to find success elsewhere!

Once both points are addressed, it becomes easier to terminate a franchise.

Any irrational limits placed on your ability to still make a living should be shared with a franchise attorney.

Potential overreach:

  • Franchisor refusing to let you open another business anywhere in the city
  • Telling you what products you can and can’t sell once you leave

To conclude, we’ll cover the benefits of legal help when you leave the original franchise business.

Reidel Law Firm and Franchise Termination

As experts in franchise law, we can help you legally terminate agreements. Guaranteeing that you can continue to provide for yourself and your family. Well into the future.  

In addition, our legal team can advise you on ways to shore up gaps in the following areas:

  • Review personal guaranty and real estate control docs
  • Franchisee formation, dissolution, guidance, and asset protection
  • Franchise operating compliance audit and coaching

We’ve worked with both franchisors and franchisees. Giving us a well-rounded knowledge of fair obligations when terminating a contract.

By effectively managing risk and maximizing opportunities for businesses we answer the needs of our clients wherever and whenever they arise.

Call Reidel Law Firm today at (832) 510-3292 or fill out our contact form.  And see how our advice can bring you success in the franchise business.

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