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How To Terminate a Franchise Agreement

June 06, 2023
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For some, one version of the American dream is owning a successful franchise business.

But sometimes, that version of the American dream isn't at all what it seems to be on the surface.

Every now and then, a franchise owner gets in over their head and realizes they weren't cut out to handle all the hard work that's involved in owning a business.

When that happens, they might want to end their franchise agreement, but can they?

Let's examine how to terminate a franchise agreement, why it sometimes happens, and how to do it right with minimal losses.

Franchise Agreement Document on Desk With Caption Left Asking How Can You Terminate Your Franchise Agreement

What Is a Franchise Agreement?

Before we dive into the details of how to terminate a franchise agreement, let's explain what it is first.

A franchise agreement is a legally binding contract between the franchisor and the franchisee. It lays out the terms and conditions set forth for the franchisee by the franchisor.

This agreement outlines the obligations of both parties involved, and they sign it when the franchisee decides to purchase a franchise.

Every franchise agreement is unique, but they all outline how the relationship works between the franchisor and franchisee.

In general, franchise agreements will detail the duration of the contract, fees and other expenses, territories, and site development; they contain non-compete clauses, guidelines on intellectual property, how training works, bookkeeping process, support in advertising, if any, insurance requirements, and anything else pertaining to the duties and responsibilities of all parties involved.

Not every franchise agreement will look the same, but these are the basic elements. The contract must be delivered to the prospective franchisee and reviewed by them 14 days before signing.

Once signed, both parties are legally obligated to fulfill the requirements of the franchise agreement until renewal or termination.

Does This Mean I Can't Get Out of a Franchise Agreement?

Actually, either party can terminate a franchise agreement at any time. There are many reasons why they can end early.

From the franchisor's perspective, they may not feel that they can fulfill the obligations of the franchise. Maybe they've gotten in over their heads and simply aren't equipped to manage their business and help the franchisees.

It's also possible for the franchisee to feel that the franchisor isn't meeting their obligations. On the other hand, a franchisor might terminate a franchise agreement if the franchisee fails to uphold the franchisor's standards outlined in the contract.

Either way, a franchise agreement can be terminated if certain steps are followed.

Franchisee and Lawyer Reviewing Franchise Agreement and the Steps They Must Follow To Terminate Contract Early
Franchise agreements will include a termination clause that consists of 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 has 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.

Other 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 contract.

If this is the case, the franchisor will not be liable for any further financial commitments to the franchisee.

Reasons a Franchisee Might Terminate a Franchise Agreement

A franchisee may legally terminate an agreement if the franchisor doesn't provide the agreed-upon training, protect the promised territory, goes bankrupt, commits an act of fraud, or misrepresents the profits of the franchise.

This contract 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 back to the franchisor.

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 representation may be required to prove it.

If a franchisee simply abandons a franchise, which is possible, they may be responsible for damages beyond what the franchise agreement entails.

Either way, if you decide to terminate your franchise agreement, doing it professionally with a lawyer can help mitigate the consequences when breaching the contract early.

Once you decide to terminate your franchise agreement, consult with an attorney and write a letter to request it in writing. Detail your intention on why you want to end the agreement and close the franchise.

Explain why you are terminating the franchise agreement. It's a good idea to let your franchisor know ahead of time. Saying you will terminate the contract within 30 days is better than telling the franchisor you are doing it "right now."

Once the request is written, make a copy to save for legal records and send the letter by mail. If you are selling or transferring your franchise, be sure to follow all of the requirements outlined in the original franchise agreement.

Calculator on Money Displaying 'Interest' Which Accrues for Any Outstanding Debts After Franchise Agreement Is Terminated
Hopefully, you will never need to worry about terminating a franchise agreement. Taking the time to find the right franchise opportunity that meets your needs is one way to help ensure you don't find yourself in an unwanted situation. And the best place to get started is here on All USA Franchises.

All USA Franchises is on a mission to bring you every one of the 3000+ franchise opportunities in the United States.

We bring together investors, franchisees, and franchisors in a single place, making it easy for you to connect and network with each other. We also make it easy for potential investors and franchisees to find the ideal business opportunity.

You can search by investment or industry, allowing you to narrow down your choices to those franchises that will offer you the best chances 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. As an investor or a potential franchisee, this means you will have access to the widest possible range of franchises.

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All USA Franchises gives you access to tons of franchise opportunities, helpful blog articles, and advice that can help you find the one that works for you. Start your franchise search today!

Remember that it's important to learn more about the franchises you are considering. Doing your research before you sign the franchise agreement can help decrease the chances that you will ever need to terminate one. Take control of your financial future and be your own boss. Let All USA Franchises be the starting point for the perfect franchise.

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