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If you are a franchisee, you may feel ready to leave your franchise and start your own business. For instance, you may wish to operate your business independently with greater control over its operations or take your career in a new direction. Alternatively, you can retain a more significant share of profits! However, it is crucial to remember that if you plan on opening a business similar to your franchise, you will likely face some restrictions with your brand. Therefore, this article will explore when you can exit a franchise agreement to start your own business.
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How Do I Exit My Current Franchise Agreement?
If your cooling-off periods expire and there is no contractual provision in the franchise agreement entitling you to terminate at will, you can either:
- negotiate an early termination with the franchisor; or
- sell your franchised business.
Alternatively, you can wait for the expiry of your current term.
Some franchise agreements contain a termination clause allowing franchisees to pay the franchisor an exit fee and terminate before the end of the term.
Alternatively, you may exit your franchise agreement early if the franchisor breaches your franchise agreement or a requirement under the Franchise Code of Conduct (the Code). For example, the franchisor may fail to:
- disclose important information (e.g., failure to provide you with a disclosure document or a full disclosure document);
- provide training or marketing support;
- provide substantiated earning information (e.g., the franchisor represented that you would be making a certain figure, but you are not, and that figure provided by the franchisor has no basis).
In any case, when a franchise agreement ends, you should ensure to document it in a formal agreement. Typically, you can do this via a deed of settlement and release.
Sell your Franchise
If you cannot negotiate a termination of your franchise agreement, you could consider:
- transferring; or
- assigning your franchise.
Typically, you must request consent from the franchisor to sell your franchise. However, the franchisor cannot unreasonably withhold consent for sale per the Code. Although, a franchisor may withhold consent when:
- the buyer does not meet the franchisors selection criteria;
- if you (as the seller) are in breach of the franchise agreement and have not remedied such breach; or
- if you (as the seller) are in debt to the franchisor.
What is a Restraint of Trade Clause?
The restrictions above relate to the restraint of trade clause commonly found in franchise agreements. There are typically two limbs of a restraint clause, being:
- the non-compete limb, which restricts you from leaving the franchise system and joining or starting another business which competes with the franchisor or which solicits the customer base of the franchise system; and
- the non-solicit limb, which seeks to prevent you soliciting the employees, suppliers and customer base of the existing franchised business, or of the franchisor.
The restraint will typically apply for a specific area and a certain period as defined in the franchise agreement.
It is important to note that a restraint of trade clause will only be enforceable against you if the terms it sets out are reasonably required to protect the franchisor’s legitimate business interests. Therefore, if your restraint of trade clause seems very restrictive, the court may deem it unenforceable.
If the franchisor believes you have breached your restraint of trade clause, they may threaten legal action and request you to shut down operations. They might even take you to court to show the restraint of trade clause was reasonable if you do not shut down and continue to operate. If the franchisor is successful, you may need to cease trading. Additionally, you may need to pay their legal costs (as well as your own), which can quickly become very costly.
Can I Offer my Current Employees Jobs in My Own Business?
A further restriction you may face in operating your franchise could be due to a non-solicitation clause.
For example, if you run a business coaching franchise, your franchise agreement may specify that you are not permitted to provide business coaching to any of your clients for a specified period after you leave the franchise. If you have dedicated years to growing a loyal client base, this may create a significant challenge to your new business.
The non-solicitation aspect of the restraint provisions are subject to the same laws and reasonableness requirements as the non-compete. Ultimately, whether it applies will depend on the facts of the relevant case and the extent to which it is deemed reasonably necessary. Generally, however, the non-solicitation limb of a restraint is more likely to be deemed enforceable than the non-compete.Continue reading this article below the form
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Can I Run My Own Business From My Current Location?
Separate to the restrictions in doing so due to any restraint of trade clause, whether or not you can open your new business in your current premises will also depend on your lease agreement and whether, when you entered your franchise agreement, you have either:
- entered into a lease agreement personally;
- entered into a lease agreement personally (with a step in deed in favour of the franchisor); and
- entered a licence to occupy the premises from the franchisor, who holds the lease.
If you hold the lease personally, you may be able to operate your business from the same premises. However, this will depend on whether you can negotiate your restraint of trade to enable you to continue operations as normal.
If you hold the lease personally but with a step-in-deed in place, you will likely not be able to operate from the same premises. Usually, the step-in-deed will mandate that where the franchisee ceases to operate the franchise business, the lease must be assigned to the franchisor.
Similarly, if you have a licence arrangement with the franchisor, it is unlikely that the franchisor will allow you to remain in the same premises where the franchisor holds the lease in their name. However, in any of the above circumstances, if you can negotiate for the franchisor to enable you to operate from the same premises, you should ensure to document this in your deed of release and settlement.
Intellectual Property and Confidential Information of the Franchisor
A final consideration is an intellectual property and confidential information clauses contained in your franchise agreement. Typically, these will prevent you using such information for any purpose other than the operation of the franchised business.
It’s essential that any new enterprise not rely on the franchisor’s intellectual property or confidential information. For example, by continuing to use their CRM tools or mimicking their promotion strategy.
Ending your time as a franchisee and starting your own business is possible. However, you should carefully consider any restraints to ensure you do not find your business being shut down before it has had a real chance to start. Your franchise agreement restraint of trade clause can limit:
- the kind of business you can start (for example, a cafe or business coaching consultancy);
- who you can employ (for example, any previous employees or employees of the system as a whole); and
- which clients or customers you can take with you.
If you need assistance understanding the exit terms of your franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If your cooling-off periods expire and there is no contractual provision in the Franchise Agreement entitling you to terminate at will, you can either negotiate an early termination with the franchisor or sell your franchised business. Alternatively, you can wait for the expiry of your current term.
A restraint of trade clause will only be enforceable against you if the terms it sets out are reasonably required to protect the franchisor’s legitimate business interests. Therefore, if your restraint of trade clause seems very restrictive, it may be deemed unenforceable.
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