Can You Terminate a Franchise Agreement if You’re Losing Money?

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Table of Contents

• Leaving the Business Behind
• Speaking to the Franchisor
• Selling the Franchise Business
• Misrepresentation by the Franchisor
• Key Takeaways

Once you have invested time and money into your franchise, it can be difficult to not see the success you hoped for. Whether or not you can terminate your franchise agreement will primarily depend on the terms of the agreement, as the Franchising Code of Conduct (the Code) does not provide many avenues for early termination.

As the first port of call, attempt to make changes to the business that may increase profits. If these efforts are futile, termination may be your next step. This article will outline some ways you may be able to terminate a franchise agreement early. It is important to note that each of these options carries their own risk, and as such, seeking advice from a franchise lawyer can be beneficial in deciding on your next step.

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 be liable to the franchisor for ongoing fees that you would have owed; 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.

Speaking to the Franchisor

If you are struggling to make a profit from your franchise business, speaking to the franchisor can be helpful. Remember that the success of your franchise business can directly impact the reputation of the entire franchise, so they will likely have an interest in rectifying the issues your franchise is facing.

Depending on the terms of your franchise agreement, the franchisor may have the responsibility of providing ongoing support throughout the franchise term. Alternatively, you may be able to negotiate a cancellation or termination of the franchise agreement with the franchisor.

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.

Selling the Franchise Business

Selling the business to another party is another viable option for exiting for the franchise. It is important to note, however, that you will need to obtain consent from the franchisor to sell your business, as they will need to approve the prospective purchaser.

In some cases, the franchisor will also have the opportunity to buy back the business from the franchisee. Generally, in these situations, there may be additional transfer fees that you will need to pay to the franchisor.

The Code allows franchisees to request to sell their business by providing written notice that includes necessary information about the purchaser. A franchisor cannot unreasonably withhold consent for the sale, although they may refuse if the proposed purchaser lacks experience or financial capacity.

Misrepresentation by the Franchisor

In some situations, the failure of the franchise business can be attributed to the conduct of the franchisor. For example, where the franchisor misrepresented information to you about the franchise and its success before you entered the franchise agreement.

There may be a claim of misrepresentation against the franchisor if the:

• franchisor lied about something before the franchise agreement was signed;
• franchisor lied so that they could get the franchisee to buy the franchise; and
• information that the franchisor lied about was fundamental to the franchise and influenced the franchisee to sign the agreement.

It is not uncommon for the franchisor to estimate possible profits for the franchise business. However, the Code states that any forecasts or projections must contain:

• details that support the claim; and
• evidence to qualify it.

Above all, it is crucial to note that franchisor misrepresentation is not easy to prove. You will need to establish that reasonable grounds are supporting the claim before you can terminate the agreement. In this situation, you may also potentially recoup any losses from the investment.

Key Takeaways

Investing your time and money into a franchise is a big commitment. As such, it is understandable that you would hope for financial success to stem from it. Unfortunately, like all businesses, there is a risk that this may not be the case. As the Code does not provide the right to terminate early when the franchise is not profitable, you will need to rely on the terms of your agreement or the alternatives outlined in this article.

If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.