Buying a franchise is a long-term investment. Generally speaking, franchisees need to prepare themselves to be in it for the long haul. But, things happen, and there are a variety of reasons why someone might want to exit a franchise prior to the date of expiration. In this article, franchise lawyer Jeffrey M. Goldstein discusses four potential options for getting out of a franchise agreement.
4 Potential Ways to Get Out of a Franchise Agreement
We emphasize “potential” because the options for getting out of a franchise agreement are limited, and different options are available in different scenarios. Depending on the circumstances presented, the options for exiting a franchise system may include:
1. State Franchise Law Violations
Several states have adopted franchise laws that provide protections to franchisees, and these laws give franchisees a right of termination in some cases. For example, depending on the state in which your franchise is located, you may have grounds to seek rescission of your franchise agreement if your franchisor committed a disclosure violation.
2. Franchisee Termination Rights
Most franchise agreements give franchisors broad termination rights while giving few (if any) reciprocal rights to franchisees. But, if your franchise agreement is the exception to the rule, you may have a contractual right to terminate in certain specific types of instances.
3. Negotiated Dispute Resolution
When disputes arise between franchisees and franchisors, it will sometimes be in both parties’ best interests to negotiate an amicable split. This may be done informally or through contractually-mandated mediation. When negotiating the termination of a franchise agreement, it is imperative to carefully consider all pertinent legal and financial implications and ensure that the settlement agreement terms are as favorable as possible.
4. Arbitration or Litigation
In appropriate cases, arbitration panels and judges can award termination as an equitable remedy. The decision to award termination may be based on a franchise law violation or other wrongdoing on the part of the franchisor.
Additional Considerations When Seeking Termination as a Franchisee
While you might think you want to terminate your franchise, there are several factors to consider when seeking to exit a franchise system. Making an informed decision about the strategy you pursue going forward requires careful consideration of all of these factors. Two key examples include:
- Loss of Investment – If you exit the system prematurely, will you lose your investment? Even if staying in the system seems undesirable, would it ultimately make the most financial sense?
- Post–Termination Covenants – Even if you have legal grounds to terminate your franchise agreement, you could still potentially be subject to the agreement’s post-termination covenants (i.e., confidentiality, non-solicitation and non-competition). Does this impact your decision-making?
Need a Franchise Lawyer? Contact Us Today
If your franchise is struggling, you should discuss your options with an experienced franchise lawyer sooner rather than later. For a free and confidential consultation at the Goldstein Law Firm, call us at 202-293-3947 or request an appointment online today.
