Owning a franchise is the American Dream for many Americans, but sometimes the American Dream isn't all it seems on the surface. Sometimes a franchise owner gets in over their head and realizes they weren't cut out to handle all of the hard work that goes into being a franchise owner. When this happens, they might want to terminate their franchise agreement, but can they? Let's examine how to terminate a franchise agreement and the consequences of the action.
What is a Franchise Agreement?
First of all, what is a franchise agreement? A franchise agreement really is a legally binding agreement between the franchisor and the franchisee that lays out the terms and conditions set forth for the franchisee by the franchisor. This agreement outlines the obligations of both parties involved and is signed by both parties at the time a franchisee actually decides to purchase the franchise.
The franchise agreement is indeed a legally binding document. It is enforced at the state level and it outlines many details of the relationship between franchisor and franchisee in addition to the overview of the relationship. A franchise agreement also covers: duration of the agreement, fees and other financial elements associated with the agreement, territories and site development, non-compete clauses, use of intellectual property, training, bookkeeping, advertising, insurance requirements, and anything else pertaining to the duties and responsibilities of all parties involved. Not every franchise agreement will look the same, but the basic elements are always a part of a franchise agreement. Once signed, both parties are legally obligated to fulfill the requirements of the franchise agreement.
Does This Mean I Can't Get out of a Franchise Agreement?
No. Either party can terminate a franchise agreement at any time. There are many reasons why a franchise agreement might be terminated. From the franchisors side, he or she may not feel they can fulfill the obligations of the franchise. Maybe they've gotten in over their head and simply aren't equipped to run the franchise. It's also possible the franchisee feels the franchisor isn't meeting their obligations. A franchisor, on the other hand, might terminate a franchise agreement if the franchisor fails to uphold the standards of the franchise set forth in the agreement. Either way, a franchise agreement can be terminated if certain steps are followed.
Franchise agreements will include a termination clause that includes these statements:
- Suspend performance under the agreement when there is a "material breach" of contract by the other party.
- Terminate the agreement when a material breach has occurred and not been resolved within a reasonable time after a demand for resolution has been made.
A material breach is when one party or the other fails to comply with a provision of the contract. Some further reasons a franchisor might terminate a franchise agreement include the franchisee being convicted of a crime, going bankrupt, losing a license necessary to operate the franchise, failing to pay royalties, or any other violations that go against the franchise agreement. If this is the case, the franchisor will not be liable for any further financial considerations to the franchisee.
Further reasons a franchisee might want to terminate a franchise agreement:
A franchisee might legally terminate a franchise agreement if the franchisor doesn't provide agreed-upon training, doesn't protect the promised territory, goes bankrupt, or in some way commits an act of fraud or misrepresents the franchise to the franchisee.
A franchise agreement can be terminated for any of the above reasons by either party. After the franchise agreement is terminated, the franchisee will be required to pay any outstanding debt to the franchisor, stop using the franchisor's intellectual property, follow any non-disclosure agreements (protection of trade secrets, etc.), and return any property of the franchise. If the franchise agreement was terminated for a legal reason and either party feels they do not owe any outstanding debt to the other party, legal action may be required to prove it. If a franchisee simply abandons a franchise, which they can do, they may be responsible for damages above and beyond what the franchise agreement states.
Either way, if you decide to terminate your franchise agreement, doing it professionally can save you a lot of headaches and keep you from breach of contract and the consequences that entails. Once you decide to terminate your franchise agreement, consult an attorney and write a letter to request termination in writing. Detail your intention to terminate the agreement and close the franchise. Explain why you are terminating the franchise agreement. It's a good idea to give a reasonable time span. Saying you will terminate the agreement within 30 days is better than telling the franchisor you are terminating it "right now." The more time you give the franchisor to make changes, the less likely you will be to face a wall. Once written, send the letter by certified or registered mail. If you are selling or transferring your franchise, be sure you are following all of the requirements set forth in the original franchise agreement.
Hopefully you will never need to worry about terminating a franchise agreement. Taking time to find a franchise opportunity that meets your needs is one way to help ensure you don't find yourself in a situation you can't handle. Taking the time to research franchise opportunities can save you from the dreaded franchise termination. The best place to get started is All USA Franchises.
All USA Franchises is on a mission to bring you every one of the 3000 plus franchise opportunities in the United States. We bring together investors, franchisees, and franchisors in a single place, making it easy for you to connect with the perfect business associates. We also make it easy for potential investors and franchisees to find the perfect opportunity. You can search by investment or by industry, allowing you to narrow down your choices to those franchises that will offer you the best chance for success. Since we never charge a fee at All USA Franchises, all of the opportunities can be seen, not just those franchise opportunities that pay to be seen. This means you, as an investor or a potential franchisee, will have access to the widest possible range of franchises.
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