A franchisee’s termination of their franchise agreement with their franchisor is a drastic step and should not be done without serious thought and planning. The franchise agreement is intended to be a long-term relationship, usually at least 10 years long. Most franchise agreements provide few, if any, reasons to allow the franchisee to terminate the agreement early.
Sometimes, though, there is no choice. This may be where the franchisor made serious misrepresentations during the franchise sales process, such as misrepresentations that amount to material fraud. Or, the franchisor may be failing to uphold its obligations under the franchise agreement. Before a franchisee tries to terminate the franchise, though, they should consider a number of important aspects of the relationship. This post explains what the three most important points are.
1. What Are the Documented Facts?
Odds are that if you tell your franchisor that you are terminating, you will have a fight on your hands. This may mean arbitration or litigation. Whether you are successful in a legal proceeding depends heavily on what you have evidence of – not necessarily what actually happened. If you cannot prove it, it may not have happened. Therefore, you should prepare a timeline of events, key documents, such as emails, letters, and text messages, and any other evidence you have to prove that you had the right to terminate the franchise. An experienced franchise attorney can help you identify and prepare this information.
2. What Do Your Franchise Agreement and Franchise Disclosure Document (FDD) Say?
Your franchise agreement and your FDD set out the rules of the game for any dispute, including termination. While you may have rights under common law, it is likely that these were modified or even eliminated under your franchise agreement.
For example, if you have a dispute with your franchisor, you may be required to send written notice within a certain period of time, or you may need to go to mediation before you are allowed to initiate a legal proceeding. The franchise agreement might also state that, notwithstanding anything the franchisor actually told you during the sales process, you did not rely on such statements. Your attorney will need to carefully craft the basis for the franchise termination to avoid running afoul of any franchisor-friendly provisions in the franchise agreement.
3. Balance the Risks vs. the Rewards.
There is no guaranteed outcome for any legal dispute, including a franchise termination. You, therefore, need to assess your best-case outcome, compare it against your worst-case outcome, and then determine your likelihood of success. This is not an exact science, but an attorney experienced with franchise disputes should be able to give you a general idea.
In particular, this requires reviewing the provisions of your franchise agreement related to damages. Most franchise agreements say that a franchisee who terminates will be liable for lost royalties for the remainder of the term of the franchise agreement – if the franchisee loses. This may be a substantial amount of money. On one hand, your franchise may be in such dire straits that you will become insolvent if you continue under the franchise agreement. On the other hand, the lesser of the evils may be to continue under your franchise agreement.
Whatever your circumstances, before you terminate a franchise agreement, you should educate yourself about all the factors that will be involved, including the evidence you have, the terms of your franchise agreement, and the balancing of the risk factors.
Dye Culik PC has been involved in numerous franchise disputes. In our experience, sometimes, what is needed is an attorney to facilitate a conversation with the franchisor to both protect your rights and address your obligations under the franchise agreement.
Dye Culik PC is a Charlotte, North Carolina, business and franchise law firm representing franchisees and franchisors throughout North Carolina. If you have a question or problem with your franchisor, or if you are purchasing a franchise, contact us first to ensure that your financial and legal interests are looked after.