As per a franchise agreement, the franchisee agrees to run the franchise for a set period (generally five or more years).
This can be quite a daunting phase for franchises. As a potential franchisee, before you bind yourself to a franchise agreement, there are specific questions you need to ask, such as:
These potential risks are quite common in all business ventures. If you are a franchisee and want to know when you can terminate your franchise agreement, read on:
If you decide against moving forward with the franchise venture early on, there is a cooling-off period of seven days provisioned in the Franchising Code of Conduct. You can termite your agreement within seven days of either:
This cooling-off period is standard only in the case of an entirely new franchise agreement and isn’t applicable if you are transferring or renewing your franchise. As per the Franchising Code of Conduct, the franchisor would have to provide you with the refund minus any “reasonable expenses”. They will also need to set out how the “reasonable expenses” would work and will calculate those accordingly while deducting an amount.
Apart from the seven-day cooling-off period applicable to all franchises, most franchise agreements don’t permit franchisees to terminate their franchise agreement early (before the term ends). In this case, it is crucial that you get some legal advice and carefully review your franchise agreement before signing on the dotted line.
Although not very common, some franchise agreements provide franchisees with the option to terminate. As a potential franchisee, you should consider negotiating this type of choice where you can terminate the agreement, in case the original franchise agreement doesn’t have this clause.
The other negotiation option open to you is the inclusion of an exit clause in case certain events occur. For instance, if there is a premises relocation, or if the financial institution you had approached does not give their approval, you would have the right to terminate the franchise agreement.
In case there is no option to terminate, you would have to operate the franchise till the expiry date mentioned in the agreement. However, if the franchisor breaches the franchise agreement in any way, you might have the option to terminate. It’s likely that you would have to follow the set dispute resolution procedure as per the Franchising Code of Conduct or the franchise agreement.
You can also utilise the dispute resolution procedure and request a termination of your franchise agreement. But this option is open to you only if there is just cause of action against that franchisor which indicates they have breached the franchise agreement. There is no guarantee that following this process will lead to termination as that will depend entirely on how strong your case is.
Although most franchisors will not publish this, if you and they negotiate the termination of the franchise agreement mutually, you would be able to terminate the agreement. As a potential franchisee, this is one area where you would be able to undertake additional due diligence.
So, maybe you could consider contacting former franchisees that have terminated their franchise agreements and understand what the circumstances surrounding the terminations were. When you are entering a franchise agreement, there is a certain level of commitment and risk that comes with it.
You need to closely consider various termination options before making your final decision to purchase. It’s best to cover all your bases, and you should work with a franchise lawyer during this stage. They will peruse the document to make sure there are no loopholes in it and will also check about agreement termination clauses.
This process should be part of the due diligence you conduct when you are considering purchasing a franchise in any specific network. It will help reduce the risk aspect for you, which is crucial when you are venturing into any new business space.
If you want to know anything more about how franchise agreements should be checked, please get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form, and one of our experts will contact you as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435