If you have spent some time operating a franchise, you may feel confident enough to leave the franchise and start your own business. You may wish to do this in order to:

  • have greater control over business operations;
  • take your career in a new direction; or
  • receive a greater share of the profits.

You will face certain restrictions, however, if you intend to open a business that is similar to the franchise you currently run. You should consider these restrictions when planning your next move.

How Do I Exit My Current Franchise Agreement?

There are two ways to exit your franchise agreement. You can either:

  • negotiate an early termination with the franchisor; or
  • sell your franchise.

If the franchisor consents to early termination, you may be able to exit your franchise agreement. Some franchise agreements include a termination clause, which allows you to pay the franchisor an exit fee and terminate before the end of your term.

Alternatively, you may be able to terminate early if the franchisor has breached your franchise agreement. A breach could be any promise that a franchisor made under the agreement but did not comply with.

For example, the franchisor may have failed to:

  • provide a certain level of marketing or training support (e.g. the franchisor promised to provide training on an important piece of software but failed to do so);
  • disclose important information (e.g. the franchisor did not provide you with a current disclosure document); or
  • keep adequate records (e.g. the franchisor did not keep records of supporting material for your disclosure document for six years).

If you have a genuine claim against the franchisor, you may be able to use this as leverage to negotiate an early exit. Once you have negotiated the terms of your exit, you should record these terms in a formal agreement. This agreement is typically set out in a deed of settlement and release.

If you are unable to negotiate a favourable exit, you may be able to sell your franchise. Most franchise agreements permit the sale or transfer of the franchise with the franchisor’s consent. If this is the case with your agreement, the franchisor cannot deny a reasonable request to sell or transfer.

What Is a Restraint of Trade Clause?

Most franchise agreements will include a restraint of trade clause, which is sometimes also called a restrictive covenant or non-compete clause. A restraint of trade clause prevents you from leaving the franchise and joining or starting another business that competes directly with the franchisor. However, a restraint of trade clause will only be enforceable if the terms it sets out are reasonable. If your agreement seems very restrictive, it may not be enforceable.

For example, if you run a cafe franchise, a restraint of trade clause that prohibits you from opening a cafe for twelve months may be unenforceable because the length of time is not reasonable. A restraint of trade clause that prohibits you from competing with the franchisor for three months, however, may be enforceable.

If you breach a restraint of trade clause, the franchisor may threaten legal action. They could then take you to court to prove that the clause was reasonable if you continue to trade. If the franchisor is successful, you may have to cease trading and pay their legal costs as well as your own. This can quickly become very expensive.

If your franchise agreement contains a restraint clause, you should consider negotiating the terms of the clause. You may be able to negotiate a more favourable arrangement with your franchisor. Include any agreement you make in your deed of settlement and release.

Can I Offer My Current Employees Jobs in My Own Business?

Your franchise agreement may also include a non-solicitation clause. This generally means that you will need the franchisor’s consent to employ any current or former employees. In some cases, this clause will also extend to customers and clients of your franchise.

For example, if you run a gym franchise, your franchise agreement may specify that you are not permitted to train any members of the gym for a certain period after you leave the franchise. If you have spent years growing a loyal client base, this may present a significant challenge to your new business.

If you would like to start a business with similar clients to your franchise, you should try to negotiate the terms of your non-solicitation clause in your deed of settlement and release.

Can I Run My Own Business From My Current Location?

Whether you can open your new business in your current premises will depend on your lease agreement. When you entered into your franchise agreement, you will have either:

  • entered into a lease agreement personally; or
  • been granted a licence to occupy the premises from the franchisor, who holds the lease.

If you hold the lease yourself, you may be able to operate your new business from the same location. However, this will depend on whether you can negotiate the restraint of trade clause and continue trading in the same area.

If you have a licence arrangement with the franchisor, the franchisor is unlikely to allow you to remain in the same premises. If you are able to negotiate staying in the same location as part of your exit terms, make sure that your deed of settlement and release clearly states this.

Your location may be very important to your business. For example, your business may be well-known and liked by locals. Alternatively, you may benefit from a particular source of foot traffic, such as a nearby school or train station. You should consider the impact that moving to a new location may have.

Key Takeaways

Exiting a franchise and starting your own business is possible, but you should consider your options carefully. Your franchise agreement’s restraint of trade clause and non-solicitation clause may limit:

  • what type of business you can start;
  • who you can employ; and
  • which clients or customers you can take with you.

However, you may be able to negotiate an exit so that you will be able to start your own business on favourable terms. If you are a franchisee looking to exit your agreement and start your own business, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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