Can You Terminate Your Franchise Agreement?

The rights to end the franchise relationship, to sell your franchised business, or to pass your franchised business on to a beneficiary are determined by the terms of your franchise agreement and the Franchising Code of Conduct (the Code).

Ending the Franchise Relationship

Under the terms of the Code and on the basis that you are not renewing or extending an existing franchise agreement, you can end your franchise agreement

• within 14 days of entering into your franchise agreement, or
• within 14 days of making a payment under your franchise agreement (the cooling off right).

Apart from a cooling off right it is rare to see a franchise agreement which allows you to end the franchise agreement early without paying an exit fee or other money to the franchisor.

However, you can also end the franchise agreement early if your franchisor has breached an essential or fundamental obligation under the agreement.

You should have someone check the provisions of your franchise agreement and advise you

• what rights you have if you want to end the franchise agreement early.
• if you will have to pay any money to the franchisor if you want to end the franchise agreement early.

If you do not have any right to end your franchise agreement early you should speak to your franchisor and ask what the franchisor’s policy is in these circumstances.

If you are happy with what the franchisor represents is their policy you should ask your franchisor to put this in writing.

If there might be a substantial amount of money payable to the franchisor if you end the franchise agreement early, you should ask your franchisor to change these provisions in the franchise agreement.

If your franchisor is unwilling to change these provisions, you should make any decision to enter into the franchise agreement with detailed information of:

• the circumstances in which you may be required to pay an amount of money to the franchisor on ending the franchise agreement early,
• the maximum amount of money (including damages) that you may be required to pay if you end the franchise agreement early.
  
  

Selling your Franchise Business

The sale of your franchised business will be determined by the provisions of your franchise agreement. Most franchise agreements contain provisions which will allow you to either sell the franchised business back to the franchisor or to sell the franchised business to a third party approved by your franchisor (your franchisor will want to know that anyone taking on the franchised business is a suitable franchisee).

Your franchisor will also normally have the first option to purchase your franchised business either at market value or on the terms and conditions set out in your franchise agreement.

If you sell your franchise business to a third party it is likely that you will have to pay a transfer fee to your franchisor. You should be aware of the amount of the transfer fee before you set the sale price for your franchised business.

It is important that your clearly understand the terms of your franchise agreement which affect the sale of your franchised business before you enter into the franchise agreement.

If you sell the franchised business you will also normally be subject to restrictions such as confidentiality and restraint of trade. These restrictions are designed to protect the franchisor’s goodwill. Again it is important that you clearly understand the proposed restrictions before you enter into the franchise agreement.

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.