You have purchased a franchise, invested your money, but for one reason or another you’re not making the revenue you first thought you would. In fact, you’re losing money!
There are several ways you can terminate a franchise agreement and get out a contract. This said, each option is risky and carries with it potentially negative consequences. You should decide which, if any, option works for and base this decision on your personal position (financial and legal). For advice, it’s worth speaking to a franchise attorney to get an idea of the options available to you.
1. Leaving the business behind
Depending on the terms of your lease, you might want to leave the business behind and abandon your post as franchisee. If you go down this path, however, you could be facing a number of obstacles:
- The franchisor will terminate the agreement effect of immediately – a right codified in the Franchising Code of Conduct;
- You may be sued for the remaining rent that you would have paid the landlord had you not abandoned the franchise;
- You may also be liable to the franchisor for ongoing fees that you would have owed had you remained operating the franchise; or
- You will be pursued by the franchisor as a joint tenant on the lease for any unpaid rental contributions up until you have organised a new lessee.
If any of the above scenarios arise, contact a franchise lawyer for advice on how to proceed. Franchise lawyers are experienced in this area and will set out the best causes of action to take.
2. Negotiating the cancellation of the agreement
It is not impossible for the franchisor to openly negotiate the cancellation of the franchise agreement. If this is the case, the franchisor may require a few additional things:
- Either you pay an exit fee; or
- They pay you an exit payment to avoid any further dispute and ensure you exit the franchise system.
In either of the above scenarios it’s more than likely that the franchisor will request you sign an agreement stipulating your forfeiture of the franchise agreement as of a certain date. In this agreement you will find a release of the franchise entity, as well as a release of any guarantors who were part of the agreement. In any case, speak with a franchise lawyer before signing any agreement.
Franchise lawyers are essential during the negotiation process, especially if you find yourself potentially facing a drawn-out dispute with the franchisor.
Don’t forget to call your accountant if there is any risk of insolvency.
3. Sell the Franchise
You can attempt to make a sale of the franchise to another party, provided the franchisor has permitted this and approves the purchaser. It’s not unlikely that you might lose money on your initial investment, given the unfavourable circumstances.
In many cases, the franchisor will have the right to buy-back the business from the franchisee. In these cases, however, there may be additional transfer fees owed to the franchisor upon the sale of the business.
In some circumstance, you may attribute the business’ failure to the conduct of the franchisor. This might be due to the franchisor having misrepresented you at the outset of the agreement. Of course, you would need a franchise lawyer to provide you with a letter of advice setting out any causes of action that are available to you.
If you and your franchise lawyer can show that there may be reasonable grounds for terminating the agreement, you may be able to recuperate any losses from the investment directly from the franchisor. Keep in mind that misrepresentation is not easy to prove and should only be considered if you have a franchise lawyer assisting you and you have ample evidence proving your case.
No matter how the franchise agreement comes to an end, there will certainly be repercussions for doing so. This includes refraining from any further use of any materials or intellectual property of the franchisor. In some cases, there could be certain restraints, such as non-compete clauses.
We would advise you speak with a franchise lawyer here at LegalVision before you take any further steps. For effective risk management, you should call 1300 544 755 and speak with one of LegalVision’s franchise lawyers.