The nature of the economic environment is ever-changing, and external factors like a market downturn can significantly impact your franchise’s profitability. Paying weekly franchise fees during such challenging times can seem overwhelming. Although terminating your franchise agreement is unlikely in these circumstances, you have alternative options to address this issue. This article outlines some solutions to consider.
Termination Rights Under the Franchise Agreement
It is rare that your franchise agreement would allow you to terminate the franchise agreement because of a market downturn or other economic factors. However, this is more likely with mobile or home-based franchises and may occur when:
- the franchisor wants to protect its reputation in the market; and
- the costs to the franchisor are minimal (for example, it does not hold a lease in its name).
Ultimately, your franchise agreement could potentially include this right, though it is unlikely. Therefore, seeking legal advice to review your franchise agreement is essential.
Early Termination Rights
According to the Franchising Code of Conduct (the Code), franchisees can request early termination of a franchise agreement (at any time during the term) by submitting a written request.
This request must include reasons for the termination, such as market downturn and lack of profitability. Upon receiving the request, the franchisor has 28 days to respond substantively. If the franchisor rejects the proposal, it must provide reasons for the refusal. Typically, the franchisor is not obligated to agree to early termination unless explicitly stated in the agreement.
A right to request early termination does not guarantee an early exit. However, it can open the conversation for termination or an alternative satisfactory resolution.
Discuss Temporary Franchisor Concessions or Assistance
A franchisor is more likely to offer temporary concessions or assistance during a market downturn rather than allowing you to terminate the agreement.
Franchisors strive to ensure their franchisees succeed. When franchisees fail, it tarnishes the overall image of the franchise system and reflects negatively on the franchisor. Additionally, your contact information remains on the disclosure document. This enables prospective franchisees to reach out and discuss your experience as a franchisee.
Your franchisor has the discretion to determine the type of assistance they provide. They may offer a royalty-free period, reduced royalty concessions, or onsite support.
Continue reading this article below the formTermination by Mutual Agreement or Franchisor Buy-Back
If concessions or assistance are insufficient to resolve the issues caused by the economic downturn, consider negotiating a mutual termination of your franchise agreement. Note that negotiating an exit may require a payment or similar arrangement. It will involve commercially negotiating favourable terms for both parties.
Alternatively, you may negotiate for the franchisor to “buy back” the business’s assets and agree to terminate the franchise agreement. This buy-back will likely be at a significant discount, resulting in a loss of your total investment. However, it may be the best possible outcome when options are limited.
Dispute Resolution Procedure
The Code prescribes a dispute resolution procedure for franchisees and franchisors. If the situation escalates to a dispute, you can follow this procedure, as set out in the Code.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Key Takeaways
Your franchise agreement likely does not grant you the right to terminate due to a market downturn or other factors. However, if you find yourself in this situation, you have several options available, including:
- providing the franchisor with a written proposal for an early termination of your franchise agreement;
- seeking temporary concessions or assistance from the franchisor during this market downturn;
- negotiating a mutual termination of the franchise agreement; or
- the franchisor agreeing to buy back the franchise business from you.
If you need help terminating your franchise agreement, our experienced franchising lawyers can help. As part of our LegalVision membership, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
It is rare that a franchise agreement would allow termination solely due to a market downturn or other economic factors. However, this might be more likely with mobile or home-based franchises under specific conditions.
Termination might be possible if the franchisor wants to protect its market reputation and if the costs to the franchisor are minimal, such as not holding a lease in its name.
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