Despite the success of the franchising model for various businesses, franchisees can run into problems and wish to sell. These problems can be personal circumstances that force you to sell your business or simply that the franchise is not making money and you are thinking selling it may be the best option.
Whatever the motivation for the proposed sale of your franchise, the question is the same – How do you get out of the franchise agreement? We discuss three scenarios below:
- Termination during the cooling-off period;
- Early Termination; and
- Selling your franchise.
The Cooling-Off Period
There is an automatic right for franchisees to terminate their franchise agreements during the seven day cooling-off period after signing the agreement. Of course, seven days may not be enough time to determine whether or not your franchise will be making enough money so usually your right of termination will come down to the franchise agreement itself, as well as the contents of the Franchising Code of Conduct.
The best course of action is usually to speak directly with the franchisor regarding early termination to find out whether or not they have a policy or procedure in place for ending the agreement if you can show that you are not making money or for other personal circumstances forcing you to sell.
Termination rights are usually included in the franchise agreement. However, many franchise agreements do not provide for the early termination of the agreement by the franchisee without the requirement of an exit fee to the franchisor. If you do reach an agreement with the franchisor, make sure you draft a new and separate agreement (or a Deed of Release) outlining that you have terminated the contract by agreement.
If you wanted to avoid incurring the exit fee costs and direct negotiation with the franchisor has not been a success, then you will need to determine whether or not you have a cause of action against the franchisor for breaching the agreement (in the case where you consider the franchisor has not complied with its oblgiations under the agreement).
A breach of the agreement may allow the franchisee to terminate the contract. You will need to review the franchise agreement in detail to determine whether your specific situation amounts to a breach and whether that specific breach will allow for termination. Usually the franchisor would need to breach an essential or fundamental term of the agreement before such an action would be available.
You can also have the entire agreement reviewed in order to determine whether there would be any claims under common law which would make the entire agreement void. This arises, for example, if the franchisor has repudiated the franchise agreement by showing that they do not wish to be bound by its terms or if the franchisee was induced to enter into the franchise agreement by a false representation or statement. It would be important to speak to a lawyer that specialises in franchise law in order to determine your legal position.
Selling Your Franchise
If you believe there would be no option to terminate the agreement based on the above scenarios or if you wish to recoup the franchise fee paid, you may want to consider whether you can sell your franchise.
Again, it would ultimately depend upon whether the franchise agreement provides you with the right to sell the franchise, noting most franchise agreements allow for the sale or the transfer of the franchise subject to the franchisor’s consent. If the right does exist, the franchisor cannot reasonably withhold consent.
Associated Agreements – Premises Lease
When terminating your franchise agreement or selling your franchise, it is important to consider any other obligations associated with the business, such as a Premises Lease, vehicle or other equipment hire purchase arrangements. These obligations will be ongoing notwithstanding the termination of the franchise agreement unless they are also dealt with or surrendered appropriately.
As part of your purchase of the franchise, you need to understand the terms that affect the termination and sale of the business. If you determine your rights early on, you may be able to negotiate the termination clauses in the franchise agreement even before you sign.
At LegalVision, we have a team of specialist franchise lawyers who can assist in pointing out these key issues. We can also assist in reviewing your agreement to see whether you have other options in terminating the agreement.