How to Terminate a Franchise Agreement

Franchises are a popular way to run a business. This is because they reduce the risks facing new businesses by using already successful business models and the power of an established brand. Whilst many franchises succeed, not all of them end up being lucrative business decisions. If you experience challenges or your circumstances change, you may want to terminate your franchise agreement. In this article, we’ll discuss the different ways you can terminate a franchise agreement and what you should consider.

What is a Franchise Agreement?

A franchise agreement is the main contract between a franchisor and franchisee. It outlines the terms and conditions under which a franchisee can operate a franchise. In the document, there will be a range of clauses. As such, it is important to negotiate the terms of your franchise agreement and be clear as to what they mean. This is because these clauses will likely affect your ability to make changes to the running of your business. 

Alternatives to Termination

Often the reason you might want to terminate a franchise agreement is due to a problem with the franchise. Many of these problems might be related to the actions of the franchisor or terms of the agreement. In these cases, it might be easier to work on the problem than to terminate your agreement.

Communicate your concerns

Firstly, you should attempt to communicate your concerns to your franchisor and seek a resolution. Often franchisee concerns are shared by other franchisees. In this case, it may be more powerful to engage in negotiations with your franchisor with the backing of other franchisees. If you cannot resolve the dispute without external assistance, there is a process of dispute resolution in the Franchising Code of Conduct. This can see a mediation advisor assist you in negotiating a solution without going to court. 

How do I Terminate a Franchise Agreement?

Cooling off Period 

A cooling off period is a period of time within which you can cancel a legal contract. Therefore, if your franchise agreement has a cooling off period this is one of the easiest ways to legally terminate it.

In Australia, all new franchise agreements are given a 7 day cooling off period. Therefore, if you are renewing an old agreement or taking over an existing agreement the cooling off period doesn’t apply. This 7 day period is counted from the earliest of either the date you enter the agreement or the date you make a payment under the agreement. Whilst you may incur fees or other expenses depending on the terms of the agreement, terminating during the cooling off period is one of the easiest ways to terminate a franchise agreement.

Exit Clause

Many franchise agreements will not allow for termination of the agreement. However, if your agreement has an exit clause then this will outline the basis on which you can terminate it. Due to the business loss suffered by a franchisor upon termination, an exit clause will often have a financial penalty attached to it.

Franchisor Breach 

If no option to terminate exists then you are legally required to fulfil your obligations under the agreement. Often this will mean you have to operate the franchise until the agreement’s expiry.

If the franchisor has breached the franchise agreement, however, then you may be legally able to terminate. This process will often require that you first go through alternative dispute resolution such as mediation. If this process yields no result then it is best to seek professional advice regarding any termination based on the franchisor’s breach.

Mutual Agreement

Mutual agreement is the process of getting a franchisee and franchisor to agree on the terms of a termination. Reaching a mutual agreement with your franchisor will usually require you both to negotiate. However, if your franchise is particularly unsuccessful or the dispute is serious, this avenue might not be your best option.

Summary

Terminating a franchise agreement is not an easy process. To terminate an agreement, you generally have to rely on a cooling off period, exit clause or a form of negotiation. If you wish to terminate a franchise agreement it is often best to get professional legal advice.

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