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3 concerns for those hoping to terminate franchise contracts

On Behalf of | Mar 13, 2024 | Franchise Agreements

Entrepreneurs and investors often choose to pursue franchise opportunities as low-risk business options. Ideally, franchisees tap into an existing market and benefit from becoming part of a trusted and well-known brand. Unfortunately, issues ranging from restrictive territories to exorbitant expenses might diminish the value of a franchise agreement. An investor or entrepreneur may eventually realize that continuing to operate a franchise may only result in losses rather than profits. They may then aspire to terminate the franchise agreement.

There are several risks involved in a franchise termination that individuals may need to address for their own protection when ending an arrangement with a franchisor.

Restrictive covenants

Contracts often outline the requirements placed on both parties for the duration of an agreement. However, they can sometimes also include clauses restricting future activities. Modern franchise agreements often include non-compete agreements that prevent someone from operating a similar business at the same location or near their territory after ending a franchise agreement.

A franchisee could also be subject to a non-solicitation agreement that prevents them from trying to work with customers or even vendors that they gain access to through the franchise agreement. Determining the impact that restrictive covenants may have on future business operations is crucial when terminating a franchise agreement.

Early termination clauses

Businesses offering franchise opportunities sometimes include contract clauses with the intention of preventing early terminations. A franchise owner could have to pay a fee if they do not continue to operate the franchise for the agreed-upon duration of the contract. Depending on the operational losses the entrepreneur may have incurred, it can sometimes be a better option to pay early termination fees rather than to continue investing in a struggling business.

Secondary operational obligations

Even if a franchisee can negotiate an amicable early termination with the franchisor, they may have other obligations that they need to address. They may have signed a multi-year lease for a commercial property that could be very difficult for them to end early. They might also have long-term agreements with vendors and service providers that could lead to financial obligations or contract-related lawsuits. Someone may need to review their contracts carefully to reduce losses related to secondary obligations at the end of a franchise agreement.

Attempting to negotiate a franchise termination can be a very difficult process. Addressing the biggest risks and concerns as early as possible can diminish the impact that an early franchise termination may ultimately have on an investor or entrepreneur who is seeking to move on from a failed franchise.

NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.