Getting Out of a Franchise

When it comes to breaking a franchise contract, the law usually swings in favor of the franchisor. The main reason is franchisors are able to limit their liability through FDDs and franchise agreements with built-in clauses and disclosure. Because franchisors must list current and past litigations, how many franchises are in operation, and how many have been terminated, along with anything else material to the business, franchisees have less wiggle room when opting out of an agreement.

There are some franchisors, although rare, that provide a buyout clause to franchisees. Most franchisors, however, want to preserve franchise agreements because dissolving franchise relationships costs money and time. Franchisors generally make every attempt to reconcile problems through arbitration or mediation. You may have more options if the franchisor has not held up its end of the deal.

If a franchisor has not met legal requirements or has made misleading statements to you and has not followed through on advertising agreements or training, you may have a case. If arbitration or mediation is unsuccessful, you can pursue a lawsuit. Some franchisors allow subfranchising or reselling, although the franchisor sometimes maintains the right to buy it back from you, which may garner a less than market value price.

If a franchisee defaults on the franchise contract, the franchisor has an easier route to ending the agreement than do franchisees. Some agreements contain disclaimers that let franchisors end the agreement at their discretion, although these types of clauses are losing popularity. Instead, franchisors are rewriting disclaimers to limit their ability to terminate. Essentially, one or several conditions must be met in order for the franchisor to cancel the contract: the franchisee declares bankruptcy, is defrauding the company, the brand name is being damaged, the franchisee stops doing business, and other issues related to loss of revenue and brand value. Even if the above conditions are met, most franchisors will offer a cure period to the franchisee, in which the franchisee can rectify the default.