Buying a franchise is an excellent way for entrepreneurs to get their foot in the door of a successful company.
But when the franchisee-franchisor relationship doesn’t work out, it’s crucial to know what options are available.
So, can a franchisee terminate a franchise agreement? The answer is yes, but there are several conditions that must be met.
Generally, the termination of a franchise agreement will depend on state laws and the specific terms of the contract between the parties.
Read on for a detailed look at how franchisees can terminate a franchise agreement and the steps they should take to protect their interests.
A Closer Look At Franchise Agreements
Before delving into the specifics of terminating a franchise agreement, it’s important to understand how these contracts work.
A franchise agreement is a legal document that outlines the terms of a business relationship between a franchisor and a franchisee.
The document outlines the rights, obligations, and responsibilities of each party.
It also covers topics such as the franchise fee, royalty payments, and the length of the agreement. Additionally, it establishes whether or not the franchisee has the right to terminate the contract.
When a franchisee decides to invest in a franchise, they agree to abide by the terms of the franchise agreement and sign it to make it legally binding.
The potential franchisee must receive the contract and evaluate it 14 days before signing.
Once the franchise contract has been signed, both parties are legally required to adhere to its terms until renewal or termination. Failing to do so can result in legal action.
Know About Franchise Vs. Franchisee
The Termination Clause In Franchise Agreements
Most franchise agreements include a termination clause that outlines the grounds for terminating the contract and the consequences of doing so.
The termination clause is an important part of any franchise agreement as it gives both parties an out if the business relationship isn’t working as expected.
In most cases, a termination clause will include clauses that allow either party to do one of the following:
● Suspend work under the agreement when there is a “substantial breach” of the agreement by the other party. This “substantial breach” must be proven in order to claim a suspension.
● Terminate the agreement when a material breach of the contract has occurred and has not been rectified within a reasonable time.
● Terminate the agreement when one of the parties to the contract does not comply with a term of the agreement.
The agreement can be terminated by the franchisor in case the franchisee:
● Was found guilty of a crime
● Misses out on a crucial license or lease
● Not paying royalties
● Fails to fix mistakes after notice
● Fails to pay debts or becomes insolvent
● Fails to adhere to the location and appearance standards of the franchisor
● Fails to follow the necessary business procedures
The agreement can be terminated by the franchisee in case the franchisor:
● Does not meet contractual obligations of providing training and assistance
● Cheats or falsely represents the prospective earnings
● Fails to protect the franchisee’s commercial opportunities or domain
● Fails to pay debts or becomes insolvent
What Happens After the Termination Of The Franchise Agreement?
After the franchise agreement has been terminated or the term has run its course, the franchisee may still be required to fulfill specific contractual responsibilities under the franchise agreement.
The franchisee is obligated to:
● Put an end to using the trade name, service marks, and trademarks owned by the franchisor.
● Reach an agreement with one another. A clause that reads “Not to Complete” or “Non-Compete” should appear in the agreement.
● Pay all fees and royalties due to the franchisor under the terms of the agreement.
● Send back the franchisor’s manuals.
● Make an agreement not to disclose any company information to third parties.
In some cases, the franchisor will include a clause in the agreement that gives them the right to buy branded merchandise from the franchisee at a fair price.
Reasons Why A Franchisee Can End A Franchise Agreement
Now that you know more about the franchise agreement and the termination clause included in it let’s take a closer look at some reasons why a franchisee could choose to end their agreement.
- Not Providing the Agreed-Upon Training
The primary reason a franchisee may choose to end their agreement is when the franchisor fails to provide the promised training.
According to the Franchise Agreement, the franchisor is obligated to give the franchisee a complete and comprehensive overview of how to run and manage their business.
If the franchisor fails to meet these expectations and does not offer adequate training or support, then it could be grounds for terminating the agreement.
For example, if the franchisor does not provide a satisfactory explanation of operations or marketing plans, then this could be viewed as a breach of contract.
Furthermore, if the franchisor is not providing enough guidance on correctly using proprietary software, equipment, or materials, this can be considered a breach of contract and could result in the termination of the agreement.
2. Not Protecting the Franchisee’s Promised Territory
The Franchise Agreement outlines the franchisor’s obligation to protect and defend the franchisee’s exclusive rights to operate in a certain geographical territory.
In most cases, the franchisor is obligated to ensure that no other franchisees are permitted to operate in the same area.
If a franchisor fails to protect and defend its protected territory, then it could be grounds for termination of the agreement.
For example, if a franchisor allows another franchisee to open up a shop in the protected territory, this could be viewed as a breach of contract, and the franchisee can terminate their agreement.
3. Declaring Bankruptcy
When the franchisor declares bankruptcy, this puts the franchisee in a difficult position.
Depending on the specific circumstances, it is possible for the franchisee to terminate their franchise agreement if the franchisor has declared bankruptcy.
For a franchisee to terminate their agreement due to a franchisor declaring bankruptcy, there must be proof that the bankruptcy filing was caused by an act of financial mismanagement on behalf of the franchisor, such as failing to pay debts or filing necessary documents.
If this is not proven, then it will be more difficult for the franchisee to successfully terminate their agreement due to a franchisor’s bankruptcy.
A court ruling can also determine whether or not a termination clause applies in cases where both parties have been impacted by a bankrupt business situation.
If a court rules that both parties are entitled to protection under termination clauses, then it is likely that either party would have grounds to end any existing agreements without having to pay legal costs and fees associated with litigating such an issue.
A termination clause in an agreement may also allow either party to terminate their agreement if they have suffered losses due directly or indirectly from actions taken by the other party during or after entering into the contract.
4. Committing an Act of Fraud
If the franchisor has committed an act of fraud or failed to fulfill its contractual obligations, then a franchisee may seek to terminate its agreement with the franchise.
This can occur if the franchisor has misrepresented information about the business and its potential success, did not perform necessary financial audits, or failed to comply with regulations.
When deciding whether or not to end a franchise agreement due to such issues, it is essential for a franchisee to make sure they have concrete proof that fraud was committed by the franchisor before taking any action.
It’s also important for them to consult with legal counsel in order to protect their own rights and interests when seeking termination.
While most franchisors are well-meaning and operate in good faith, there is always the chance that a franchisor is committing fraud.
If a franchisee believes this to be the case, they must seek legal assistance to protect their rights and interests.
5. Misrepresenting Profits
If the franchisor has misrepresented the potential profits of a franchise, then this could be grounds for terminating an agreement.
For example, if a franchisor promised that its franchise would make $50,000 in net profits in its first year and the actual numbers are far lower, then this could be considered as material misrepresentation.
In order to terminate an agreement due to misrepresentation of profits, a franchisee must be able to prove that the franchisor intentionally misled them.
This should include evidence such as documentation, financial records, and other relevant information that indicates that the franchisor was not honest about its representations.
Buying a franchise can be an excellent opportunity to become your own boss, but there is always the chance that things could go wrong.
In some cases, franchisees may have to terminate their agreements with franchisors due to issues such as bankruptcy, fraud, or misrepresentation of profits.
It is important for franchisees to understand their rights and consult legal counsel if they believe their franchisor has violated any of the terms and conditions outlined in their franchise agreement.
Complete Guide on Termination of the Franchise Agreement
Terminating a Franchise Agreement: How to Get out of a Franchise Business
Franchise Agreement: Everything You Need to Know
Amit Gupta is the founder of DrFranchises – a digital marketing agency that helps brands rank better on Google Maps through local SEO strategies. Amit has over 11 years of experience in digital marketing, SEO, email marketing, and social media marketing. He’s also the owner of multiple franchises and has helped countless brands achieve success online. When he’s not working, Amit can be found playing with his dog.