What Happens At The End Of A Franchise Agreement?

Franchising is a very popular form of running of a business. However, the reality is that circumstances can change and agreements come to an end. Getting out of a Franchise Agreement isn’t as simple as it may seem. 

When you first entered a Franchise Agreement, you probably noticed the insane number of rules and regulations. These rules can be just as tricky at the end of the agreement. Whether your franchisor has breached the contract or you’re just ready to walk away, it’s a good idea to speak to a lawyer before taking any steps. 

End Of Term Obligations

What parties can and can’t do in a franchise relationship depends on what your Franchise Agreement stipulates.

Both the franchisor and franchisee need to notify the other party of what they intend to do when the Franchise Agreement is coming to an end. This means you need to communicate whether you will:

• Renew the agreement
• Enter a new agreement
• Terminate the existing agreement – in this case, the franchisor needs to provide a reason and a plan for winding up the business. 

It’s also important to provide written notice prior to terminating the arrangement.

Dispute Resolution

There are many cases where a franchisor will have multiple franchisees with similar issues. If there is more than one franchisee raising a dispute with the franchisor, it’s worth checking your Franchise Agreement to see if you can request that the franchisor deal with their disputes together (provided they are of the same nature). 

As we mentioned earlier, franchisees are not given much bargaining power through their agreements. So, it’s a good idea to chat to a lawyer to draft a strong and fair Franchise Agreement.

So, What Are The Ways Franchise Agreements Can End?

The following are some of the main ways this can happen:

1. Expiration: the agreed franchising term has finished and the franchisee no longer operates the franchise business. 
2. Renewal: the franchisee exercises the option to renew (in the Agreement) after the initial term has ended.  
3. Extension: unlike a renewal, the franchisor chooses to extend the term of the Agreement – you can read more about this here. 
4. Termination: this is when the agreement is brought to an end early. It could happen mutually, prompted by the franchisor or by the franchisee. However, Franchise Agreements will generally make it harder for a franchisee to terminate the agreement.  

Of course, there are other ways such as selling the franchise, transferring or assigning it to someone else.

Special Circumstances

There are also some circumstances where franchisors can end the agreement immediately without any notice. Some examples of when this may happen is when the franchisee:

• Walks away from the agreement with no explanation
• Becomes insolvent or bankrupt
• Endangers public health and safety 
• Engages in fraudulent behaviour 
• Agrees to terminate mutually

When Can The Franchisee Terminate The Agreement?

Generally speaking, a franchisee doesn’t have as much say in ending a Franchise Agreement. It’s uncommon to see a situation where a franchisee can end the agreement early without paying an exit fee or other money to the franchisor.

Sometimes, the agreement may include clauses that allow the franchisee to terminate the contract. However, before entering the agreement, it might be good to negotiate some terms around termination that is more suitable for the franchisee. 

Franchisor Breach

If the franchisor breaches the Franchise Agreement in any way, you might be able to terminate the agreement. You can follow the set dispute resolution procedure set out in your contract.

However, note that the dispute resolution procedure does not guarantee termination, and may largely depend on the strength of your case. 

If the franchisor has breached an essential or fundamental term under the Franchise Agreement, a franchisee could terminate the agreement at general law.

Selling Your Franchise

For whatever reason, it just doesn’t make sense to run the franchise anymore.

First, you’ll need to review your Franchise Agreement in case there are rules around whether you can sell your franchise. 

In most cases, you’ll need the franchisor’s consent before doing so. 

You can expect this process:

1. You give the franchisor written notice about the sale, asking for consent. 
2. Tell the franchisor details about the potential buyer, e.g. whether they have experience in running a similar business, their financial capacity etc. 
3. Unless there’s some pressing issue, the franchisor should provide consent.

Once you have the franchisor’s consent, it’s recommended that you talk to a lawyer to have the required documents ready. For example, you’ll need a Contract for Sale of Business or a Deed of Termination with the franchisor. If you are leasing the premises on which you run the business, then you’ll also need to get permission from the landlord and transfer your lease as well. 

What Happens After The Franchise Agreement Ends?

Usually, the Franchise Agreement will outline what you can and can’t do after it ends.

For example, the franchisee will likely be subject to a restraint of trade non-compete provision that prevents them from running a competing business with the franchisor.

Other end of term clauses you may need to be aware of: 

• If there is a lease, who holds it when the franchise ends?
• Any buyback provisions of stock and equipment

If your agreement is ending soon, it’s a good idea to have a lawyer review your contract to fully understand the implications and what your options are. 

Need Help?

It’s important that both parties understand their obligations to each other when exiting the agreement, as well as the consequences following termination. 

If you have decided to end the franchise agreement or to sell your business, we’ve got a team of lawyers ready to help:

• What rights do I have to end my agreement early?
• Can I terminate the agreement if the other party has breached?
• What do I need to do if I want to sell the business?
• Can I operate a similar business after the agreement ends?
• Does any part of the agreement apply after it ends?

You can reach out to us at [email protected] or contact us on 08081347754 for an obligation-free chat.

Editor’s note: The information in this article is correct as of March 1, 2021. With the upcoming changes to the Franchising Code of Conduct from 1 July 2021, we recommend speaking with a lawyer to fully understand your options during this time.

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