Franchisees often do not pay much attention to termination clauses in their franchise agreements. A franchisee is often excited to buy the franchise and imagines that all will go well, so there will not be a need to consider terminating the agreement. The more likely concern of the franchisee may be that the franchisor could end the contract unjustly and, in fact, there are many laws which address that scenario.
Franchisees who do think about their business possibly failing or wanting to stop working, may believe that they can just walk away from the contract. However, typically, a franchisee does not have a contractual right to terminate the franchise agreement and the failure to continue operating the franchise may result in a claim by the franchisor for substantial money damages.
Franchise agreements typically have lengthy terms, sometimes as much as 10 years or more. During such a long period of time, it is certainly possible that life events may occur which cause the franchisee to want to give up on the business. For example, during a 10-year term, the franchisee finds that after 5 years, the business is simply not generating the expected revenues. He or she may want to close the business. However, depending on the requirements of the franchise agreement, the franchisee may have to pay the franchisor the amount of royalties it would have earned had the franchisee continued to operate. Of course, if the franchisee wants to move or retire and the business is still successful, he or she may be able to sell the business but even that carries costs.
Where does that leave the franchisee? Franchisees should take care when signing a franchise agreement without counsel. Generally, the best course of action is to consult an attorney to review the agreement, explain the franchisee’s risks and options and help to develop an appropriate exit strategy. Counsel can also seek to negotiate a resolution with the franchisor as the franchisor is likely to prefer an amicable resolution rather than litigation.
If you are a franchisee considering closing your business, before you do anything seek legal representation. For questions about your options, contact us for a consultation.