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Navigating the Termination of Franchise Agreement: A Guide for Franchisees

Updated: Mar 16

Lawyer negotiating termination of franchise agreement

As a franchisee, you may have put in countless hours of hard work to establish your business. However, there may come a time when you need to consider terminating your franchise agreement with your franchisor. This can be a complicated process, and it is important to understand your rights and obligations (hopefully, you had a great franchise lawyer go over what you need to know before signing the franchise agreement). In this guide, we will discuss the termination of a franchise agreement by a franchisee and provide insights on how to navigate this process.

Terminating a franchise agreement can be a complicated and intimidating process. As a franchisee, you may feel like you’re stuck in an unbalanced and unfair relationship with your franchisor, and the thought of ending that relationship may seem impossible. But it doesn’t have to be that way.

It happened to a client of ours. We helped this client (a prospective franchisee) review the FDD and Franchise Agreement (if you don't know what "FDD" stands for head over to our blog post titled "A Consumer's Guide to Buying a Franchise"). Everything was going great for our franchisee client, until it wasn't. A franchisor vs franchisee dispute began when our client, unfortunately, was unable to acquire some necessary governmental approvals. The franchisor agreed these approvals were necessary, and (in the franchise agreement amendment - that we negotiated) the franchisor agreed to terminate the franchise agreement and refund the franchisee if those approvals could not be obtained.

Unfortunately, the franchisor made this franchisee's life miserable. They refused to refund the franchise fees, and even called the franchisee a liar (note that our client deposited over $75,000 with this franchisor, funds which were supposed to be held in escrow for the franchise agreement). Only after our firm (Lopes Law) got involved were we able to get the franchisee a full recovery of their franchise fees and a termination of franchise agreement.

At Lopes Law, we understand how to navigate the termination of franchise agreements. We are here to provide guidance and support to help you through this difficult process. In this guide, we will go through what you need to know before terminating a franchise agreement, the different ways you can fulfill your obligations as a franchisee, and how we can help make sure that everything is resolved fairly.

We will also equip you with the knowledge you need to protect your rights as a franchisee and ensure that all elements of the termination process are legally sound. So let’s get started!

Overview of Termination of Franchise Agreement

Understanding the Franchise Agreement

The franchise agreement is a legal contract that outlines the terms and conditions of your relationship with your franchisor. It is essential to understand the details of your franchise agreement, the important terms of the franchise agreement, and the termination clause before taking any action. The termination clause typically outlines the circumstances under which the franchise agreement can be terminated, the notice period required, and the consequences of termination.

Reasons for Terminating a Franchise Agreement

There can be several reasons why a franchisee may want to terminate their franchise agreement. One of the most common reasons is a breach of contract by the franchisor. For example, if the franchisor fails to provide the necessary support and training, or if they fail to meet their obligations under the franchise agreement, you may have grounds for termination.

Another common reason for terminating a franchise agreement is a change in circumstances. This could include a change in your personal situation or a significant shift in the market. If these changes make it impossible to continue operating your franchise, termination may be the best course of action.

Terminating a franchise agreement can be a complex process, especially if the franchisor disputes your reason for terminating it. There are two main ways to end a franchise agreement: with or without cause.

Termination Without Cause

Termination without cause means that you, the franchisee, choose to end the agreement and no specific breach of contract terms can be attributed to either side. Typically in these cases, prior written notification is required from you, the franchisee.

Termination With Cause

Termination with cause means that specific terms of the franchise agreement have been violated, either by the franchisor or by the franchisee. Termination with cause can happen when the franchisor is in violation of specific contractual provisions—for example, failure to adequately train and monitor franchisees or failure to provide support services as specified in the franchise agreement. When terminating with cause, it is important for franchisees to have proof that their franchisor breached the agreement and document all pertinent information related to their decision. This means that the franchisee has a legal basis against the franchisor for ending the agreement. Depending on the nature of the violation, the franchisor may have to provide written notification of the breach, depending on the existence of any implied or written notice provisions in the agreement.

Termination with cause means that the franchisee is ending the agreement due to the franchisor’s breach of contract terms. In this case, there is usually a breach of contract notice period of at least 90 days, during which the franchisor must respond and address the breach notice. If the franchisor fails to respond or fails to correct the issue, the franchisee may either terminate the agreement or seek damages.It’s important to bear in mind that if the franchisor does not agree that there has been a breach of the agreement, they may dispute the franchisee’s right to terminate the agreement. In such cases, the franchisee may have to pursue legal action against the franchisor in order to successfully terminate the agreement.

At Lopes Law, we understand the complexity of termination of franchise agreements. We specialize in working with franchisees who are looking to end their franchise agreement in a way that meets their needs, as well as protecting their rights as a franchisee. Whether you’re looking to terminate the agreement with or without cause, we can help guide you through the process and ensure that you’re making sound legal decisions.

No matter which route you decide to take, the termination of your franchise agreement must be done correctly in order to protect yourself from any legal repercussions. We understand that this can be a daunting process, and that’s why we’re here to help. Our team of experienced attorneys can provide you with the legal advice and guidance you need to make sure that your rights are protected. We will help you stay on top of the termination process and make sure that everything is handled properly.

Contact us today to learn more about how we can help you navigate the termination of your franchise agreement.

Reasons to Terminate a Franchise Agreement

When considering terminating your franchise agreement, you want to make sure that the decision is well thought-out, planned, legally sound and in the best interests of your company. To help you make an informed decision, consider examining these two conditions:

  • If your franchisor is not meeting contractual obligations set forth in the agreement and has not provided a remedy or remedy timeline in a timely manner, then you may have grounds for termination.

  • If you are experiencing financial difficulties due to a drop in sales or decreased demand for your product or service, then it may be necessary to terminate the agreement before incurring additional costs and creating too much financial stress on your business.

No matter what your reasons for terminating the agreement, it is important to understand the legal process behind it. Depending on the terms of your agreement, the process of terminating a franchise agreement may involve an informal negotiation, mediation, filing a complaint with a state or federal mediator, litigation, or arbitration.

Before initiating the termination process, it is important to carefully review all contractual documents, seek out legal advice, and be aware of the potential financial and legal implications of breaking the agreement. When possible, seek resolution through alternative dispute resolution methods, such as mediation or arbitration.

Once the decision is made to terminate the agreement, the next step is to formally notify the franchisor in writing. This should include details about why you are choosing to terminate the agreement, as well as a timeline for when the termination will take effect. After the agreement is terminated, it is important to ensure that all necessary documents and assets are properly transferred and that all outstanding payments are made.

Terminating a franchise agreement can be a difficult process, but with the right knowledge and support, you can help make sure that everything is resolved fairly. With the right preparation and understanding of the process, you can help protect your rights as a franchisee and ensure that all elements of the termination process are legally sound.

But remember that each case is unique and should be carefully considered against all laws and regulations in order to protect both parties. Consulting with a legal expert can help ensure that all of the proper steps are taken during the termination process.

How to Get Out of a Franchise Agreement

If you have come to the point where terminating your franchise agreement is the best option for you, there are certain steps you must take in order to ensure that the process is done correctly and smoothly. Here are the steps you should take when terminating a franchise agreement:

  1. Notify Your Franchisor: You must provide written notice to your franchisor that you plan on terminating the agreement. This notice should include the date of termination and can be sent by registered mail or email, depending on what is outlined in the contract.

  2. Pay All Outstanding Fees: Before ending the agreement, any fees or debts both parties owe must be paid in full. These may include royalties, advertising fees, outstanding debts and more.

  3. Follow Termination Timelines: Franchise agreements vary in length, so make sure to check yours to ensure that you follow all necessary timelines when terminating the agreement. Some contracts may require a few months’ notice before termination is official, so be aware of this!

  4. Seek Legal Representation: Terminating a franchise agreement can be very complex due to all of the legal red tape attached to it, so seeking out legal representation from an experienced professional may be beneficial here -especially if there are any disputes involved! A lawyer will help guide you through this process and make sure that everything is done correctly according to law.

Checklist for Terminating a Franchise Agreement

When deciding to terminate a franchise agreement, there are several steps that a franchisee should take to ensure the process goes as smoothly as possible. Here's a checklist to help you get started:

Before Termination

  1. Review the franchise agreement and all amendments.

  2. Understand the terms of the agreement, including termination rights, obligations and remedies.

  3. Understand applicable state and federal franchise laws regarding termination rights, notification requirements and remedies for breach of contract or misrepresentation.

  4. Speak to an attorney or franchise consultant with expertise in termination of franchise agreements.

  5. Maintain accurate records, such as sales data, management expenses and other financials related to the business or franchise system.

  6. Compile all data relevant to the dispute between yourself and your franchisor, such as notices received or documents requested by either party that are related to the dispute or termination process.

  7. Make sure that any monies that may be due from either party are calculated accurately prior to beginning negotiations for termination of the relationship.

Termination Process

  1. Notify your franchisor of your intention to terminate in writing according to the terms of the contract outlined in your agreement; include any notifications required by state or federal law in this communication if applicable.

  2. Consider whether negotiation is needed – it is always better for both parties if this can be done amicably outside of court proceedings; however, having legal representation at this stage can help ensure you are getting what you want out of any negotiations between yourself and your franchisor.

  3. Be prepared for counter proposals from both sides; if there is not mutual agreement then consider initiating

  4. If both parties are unable to agree, then litigation may be necessary. Franchisors are usually aware of the risks and costs associated with litigation and may be more willing to come to an agreement outside of court proceedings. It is important to be aware of any applicable state and federal laws that may provide remedies for breach of contract or misrepresentation by the franchisor prior to the initiation of the litigation process.

  5. Have an attorney review any settlement agreements prior to signing and make sure that all of your rights and obligations are clearly outlined. Be aware that both parties are required to abide by the terms of the settlement agreement, and that any breach of contract or misrepresentation can result in legal action.

  6. If litigation is necessary, be aware that the process can be lengthy and expensive. It is important to understand all of the risks associated with litigation, and to make sure that you are prepared to incur the costs associated with court proceedings.

  7. Once the termination process is completed, it is important to review the experience and to determine if there are any lessons that can be learned for future business relationships. It is also important to document the entire process and to ensure that any necessary payments are made in a timely fashion.

How to Negotiate the Termination of a Franchise Agreement

If you have determined that it is time to terminate your franchise agreement, the next step is to begin negotiations with the franchisor. This can be a complicated and emotionally charged process, but there are ways to make it as smooth as possible. Here are some tips for negotiating the termination of a franchise agreement:

Know Your Rights

It's important to stay informed about your rights under the franchise agreement and in your state's laws. Be sure you fully understand your rights regarding termination before beginning negotiations.

Get Professional Legal Advice

Navigating a dispute with a franchisor can be complex, so it's best to get professional legal advice before entering into negotiations. A legal professional can help you understand your options and how best to proceed with negotiations. Learn more about how a Lopes Law franchisee attorney can help you here.

Determine What You Need

Before beginning negotiations, take some time to think about what you need out of the process. This could include getting out of any remaining contractual obligations, receiving payment for lost income or getting back any fees paid upfront. Knowing what you need will help you enter into negotiations more confidently and help guide any decision making throughout the process.

Document Everything

Once negotiations are underway, make sure to document every step of the process. This should include any emails, phone calls and in-person meetings, as well as any agreements that are reached. Proper documentation can help protect you in the event the dispute goes to court and can provide evidence of your efforts to resolve the dispute.

Stay Calm

It's important to remember that the negotiations process can be long and difficult. Don't let emotions take over and try to remain as calm and cooperative as possible. This will not only help keep the process running smoothly, but it will also help ensure that you get the best outcome possible.

Understand the Termination Process

It's important to understand the process for actually terminating a franchise agreement. This includes understanding any costs that may be involved, the length of the process, and any applicable laws and regulations. This will help ensure that the termination is done in the most efficient and effective way.

By knowing your rights, getting professional legal advice and determining what you need from the negotiation process, you can navigate the termination of a franchise agreement with confidence and clarity.

What Happens When a Franchisor Breaches the Agreement?

If a franchisor breaches the agreement, then the franchisee has the right to terminate the franchise agreement. This can be done by sending a written notice of termination to the franchisor. Depending on the contract's language, a franchise can also seek damages related to any breach of the agreement by the franchisor.

However, it is always in a franchisee's best interest to attempt to resolve disputes before seeking legal action and terminating the agreement. While most contracts have termination provisions that allow either party to terminate at will, there may be options available for both parties that can help restore their relationship and save them time and money in litigation costs.

For instance, if there is an issue with royalties or fees in dispute, then mediation may be an option for both parties to discuss and negotiate those issues before filing a formal complaint or seeking other legal remedies. Mediation often resolves issues quickly and amicably without having to go through litigation and risking long-term damage to relationships.

Once a franchise agreement is terminated, franchisees should take steps to protect themselves and their business. This includes getting a written release from the franchisor, ensuring all debts and obligations have been paid, and canceling any business licenses that were obtained through the franchise agreement. Additionally, franchisees should check with the local government to make sure they do not need to keep their business registered with the franchisor.

Finally, it is important to keep track of all documents related to the franchise agreement and its termination. This includes copies of the agreement, notices of breach and termination, correspondence with the franchisor, and any court filings or other legal documents associated with any disputes. Keeping thorough records of everything can help protect the franchisee in the event of any future disputes.

How to Handle Disputes During Termination Process

Getting out of your franchise agreement can be difficult, so it is important to understand how to handle disputes that arise during the termination process.

Understand Your Rights

If you are in dispute with your franchisor, it is important to understand your rights under the agreement and any applicable state and federal laws. Knowing what terms, conditions and legal considerations apply can help you when negotiating with the franchisor.

Negotiate in Good Faith

When negotiating with your franchisor, it is important to enter into negotiations in good faith and comply with any obligations under the franchise agreement. As a franchisee, you may be required to make payment, transfer assets or take other steps as part of the termination process.

Seek Professional Guidance

Negotiating a successful resolution of a franchise dispute can be a complex and time-consuming task. Seeking out professional guidance from an experienced lawyer can give you peace of mind knowing that your interests are appropriately represented in negotiations or litigation. At Lopes Law, our team of attorneys specializes in representing franchisees in negotiations with their franchisors as well as providing dispute resolution or litigation services as needed.

How to Sell a Franchise Business

If you are planning to exit your franchise agreement, you have the option to sell your business and its associated assets. To do this, it is important to understand the process and the steps involved.

Gather Necessary Documents

The most important step in selling a franchise business is preparing the necessary documents that must be given to potential buyers. These include your franchise agreement, copies of any agreements related to the purchase of products or services from the franchisor, financial statements, and records of any contractual obligations you may have. Having all of this information is essential for potential buyers as they evaluate whether they are interested in acquiring your franchise business.

Make Sure All Obligations Are Fulfilled

Once you have identified a buyer who is interested in purchasing your franchise business, make sure that all contractual obligations are fulfilled before the transaction can be completed. This means paying off any outstanding debts and liabilities, as well as honoring existing contracts with suppliers and customers. Furthermore, it may also require negotiating with the franchisor to obtain a release from remaining obligations under their agreement with you.

Complete the Transfer Agreement

The final step to selling a franchise business is to complete the transfer agreement. This document outlines the terms and conditions of the transfer, including the purchase price, any outstanding liabilities to be paid by the seller, and provisions for the buyer to assume the franchise agreement. It is important to read carefully and understand the terms before signing the agreement, as any mistakes or omissions can be difficult and costly to rectify.

Once the transfer agreement is finalized, the franchise business can be transferred to the buyer. During this process, the franchisor must be kept informed and provided with copies of the documents for their review and approval. Following completion of the transfer agreement and payment of the purchase price, the franchise business will officially be owned by the buyer.

By taking these steps beforehand, you can ensure that the transition for both parties will go as smoothly as possible. In addition, having everything taken care of prior to the sale will help protect both parties from potential legal disputes in the future.

Selling a Franchise

At this point, you may be considering selling your franchise after a dispute with your franchisor (or for any other reason). However, selling a franchise is not as simple as selling any other business. There are specific steps that you need to take to ensure a smooth transaction, and it is essential to understand the legal and financial implications of selling your franchise. Here is a step-by-step process for selling a franchise, as well as tips and considerations to keep in mind.

Step 1: Review the Franchise Agreement

Before selling your franchise, it is essential to review your franchise agreement. The agreement may contain provisions related to the sale of the franchise, including restrictions on who can buy the franchise and how the sale can be completed. Additionally, the agreement may require you to obtain the franchisor's consent before selling your franchise. Failure to comply with these provisions may result in legal action and the termination of your franchise agreement.

Step 2: Get Your Franchisor to Agree

You may be thinking to yourself, "how am I supposed to get the franchisor to agree when we are in a dispute?" If you are in a dispute with your franchisor, getting their agreement to sell your franchise can be challenging. However, it is essential to understand that the franchisor's consent is often required before selling your franchise, as outlined in your franchise agreement. If you are unable to obtain your franchisor's agreement, you may need to seek legal advice to determine your options. Additionally, it may be possible to negotiate with your franchisor to obtain their consent, particularly if you have a strong case and a well-prepared exit strategy. At Lopes Law, we have extensive experience in negotiating with franchisors on behalf of franchisees, and can help you to navigate this process. Contact us now for help with this process (the sooner we start, the better the potential outcome).

Step 3: Determine the Value of Your Franchise

The next step is to determine the value of your franchise. This involves assessing the financial performance of your franchise, including revenues, expenses, and profits. You may also need to consider the value of any assets, such as equipment and inventory, as well as any liabilities associated with the franchise. Understanding the value of your franchise will help you to set a realistic asking price and attract potential buyers.

Step 4: Advertise Your Franchise for Sale

Once you have determined the value of your franchise, you can start advertising it for sale. You may want to consider working with a broker or a business intermediary who can help you to find potential buyers and manage the sales process. Additionally, you can advertise your franchise on various online platforms, such as business-for-sale websites, social media, and online classifieds.

Step 5: Screen Potential Buyers

As potential buyers show interest in your franchise, you will need to screen them to ensure that they meet the requirements set out in your franchise agreement. This may include assessing their financial situation, experience, and qualifications to run the franchise. Additionally, you may want to require potential buyers to sign a non-disclosure agreement before sharing any confidential information about your franchise.

Step 6: Negotiate the Sale

Once you have identified a potential buyer, you can start negotiating the terms of the sale. This will involve agreeing on the purchase price, payment terms, and any other conditions related to the sale. It is essential to work with a lawyer who specializes in franchise law to ensure that the sale complies with the terms of your franchise agreement and that you are protected from any legal liability.

Step 7: Make Sure You Are Not Liable After the Sale

This is a very important step, that most people overlook. After you have sold your franchise, it is essential to ensure that you are not liable for any legal or financial issues that may arise after the sale. This can be accomplished by including appropriate provisions in the sales contract, such as indemnification clauses, warranties, and representations. It is also important to comply with any post-sale requirements set out in your franchise agreement, such as the transfer of any licenses or permits, and to provide notice of the sale to your franchisor and any other relevant parties. Failing to take these steps can result in legal action against you, even after the sale has been completed. At Lopes Law, we can help you to ensure that you are protected from any potential liability after the sale of your franchise. Contact us today to learn more about our franchise law services.

Selling a franchise requires careful consideration and planning. As a franchisee, it is essential to understand the legal and financial implications of selling your franchise, and to comply with the terms of your franchise agreement. At Lopes Law, we have extensive experience in franchise law and can help guide you through the process of selling your franchise. Contact us today to schedule a consultation with one of our franchise lawyers.

Selling a Business Checklist

Selling a franchise can be a complex process, and it's important to ensure that you have taken all the necessary steps to protect yourself and ensure a successful sale. To help you through the process, we have put together a checklist of important items to consider when selling your franchise:

  1. Review your franchise agreement: Before proceeding with the sale, review your franchise agreement to understand your obligations and any restrictions on selling your franchise.

  2. Obtain franchisor consent: In most cases, you will need to obtain the franchisor's consent before selling your franchise. Be sure to follow any procedures outlined in your franchise agreement for obtaining consent.

  3. Prepare a business plan: A comprehensive business plan can help you attract potential buyers and demonstrate the value of your franchise.

  4. Value your franchise: Determine the value of your franchise by considering factors such as your revenue, profits, assets, liabilities, and market conditions.

  5. Market your franchise: Develop a marketing strategy to attract potential buyers, including advertising, networking, and utilizing online platforms.

  6. Screen potential buyers: Screen potential buyers to ensure that they are qualified and capable of operating your franchise.

  7. Negotiate the sale: Once you have identified a potential buyer, negotiate the terms of the sale, including the purchase price, payment terms, and any contingencies.

  8. Prepare a sales agreement: Prepare a sales agreement that outlines the terms of the sale and protects you from any potential liability after the sale.

  9. Transfer licenses and permits: Transfer any licenses and permits required to operate your franchise to the new owner.

  10. Provide notice to relevant parties: Provide notice of the sale to your franchisor, any relevant regulatory agencies, and other parties as required by law or your franchise agreement.

  11. Gather financial documents: Collect all relevant financial documents, such as tax returns, profit and loss statements, and balance sheets, to provide to potential buyers.

  12. Conduct due diligence: Before finalizing the sale, conduct due diligence on the potential buyer to ensure that they are financially stable, have the necessary experience, and are a good fit for your franchise.

  13. Consult with an accountant: Consider consulting with an accountant to help you understand the financial implications of the sale, including any tax implications and strategies for maximizing the sale price.

  14. Notify employees: Once the sale is finalized, notify your employees of the change in ownership and any relevant information regarding their employment.

  15. Develop a transition plan: Develop a transition plan to ensure a smooth transfer of ownership, including training the new owner and transferring any relevant information or documentation.

  16. Close the sale: Once all necessary steps have been taken, close the sale and transfer ownership to the new owner.

  17. Stay in compliance with any post-sale requirements: After the sale has been completed, ensure that you remain in compliance with any post-sale requirements outlined in your franchise agreement, such as non-compete clauses or ongoing support obligations.

By following a comprehensive checklist and working with experienced franchise law attorneys, you can navigate the sale of your franchise with confidence and ensure a successful outcome. Contact Lopes Law today to learn more about how we can assist you with the sale of your franchise.

How to Close a Franchise Business

Knowing when and how to close a franchise business can be an intimidating prospect for franchisees, especially without the proper legal knowledge and experience. Fortunately, Lopes Law is here to help franchisees navigate the termination of their franchise agreement.

Negotiate the Termination with Your Franchisor

Your franchise agreement may contain language specifying the process by which a franchisee can submit a notice of termination to the franchisor. If it is not detailed in your agreement, you should discuss your desired exit plan with the franchisor. Negotiations with experienced negotiators at Lopes Law can help ensure that you are properly compensated for any assets or investments you have made in your business, or help you walk away from the business without any financial obligations or restrictions.

Steps to Close Your Business

If it is time to close your business, there are several steps you should take before officially shutting down operations:

  1. Notify your franchisor in writing of your intent to terminate the agreement; this includes providing notice of termination per contractual timelines if applicable

  2. Meet any requirements listed in the agreement such as returning any intellectual property (IP) and other franchisor owned materials

  3. Secure all financial records pertaining to your business for future reference

  4. Make sure all employees are notified of upcoming closure

  5. Sell or transfer any remaining inventory

  6. Notify local businesses and customers

  7. Remove signage from leased property and coordinate return of keys/access cards

  8. File all relevant documents with local, state and federal agencies (if necessary)

By taking these steps, you will be on track to close your franchise business smoothly and efficiently with appropriate

Contact Lopes Law for Help With Terminating Franchise Agreement

Terminating a franchise agreement is not a decision to be taken lightly. It requires navigating a complex legal process, and it’s essential that you consult with a qualified attorney before you take any action. With the right guidance, you can make an informed decision that protects your rights, ensures that you comply with your obligations, and allows you to move on to the next chapter without sacrificing your interests.

At Lopes Law, our team of experienced franchisee attorneys will provide the legal support you need to navigate the complexities of the termination process. We will review your franchise agreement and help you understand your rights and obligations while negotiating with the franchisor to ensure that you receive proper compensation or walk away without any financial obligations. We can help you understand the local, state and federal regulations that may apply to your situation, and assist with filing any necessary paperwork. Our team’s extensive experience, knowledge, and compassion will help you make the best decision for your future and protect your interests.

If you need legal advice or representation as you move forward, Lopes Law can provide you with the comprehensive, experienced guidance you need. Contact Lopes Law today to get started.


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