How to exit your franchise business the right way.
For various reasons you may need to exit your franchise business. These reasons can be many and varied and include:
- separation and divorce
- family reasons
- time to sell and do something different
- disputes with your Franchisor
- dissatisfaction with the system, the Franchisor, certain aspects of the franchise business and perhaps a combination of some or all of the above.
The main ways of exiting are:
- to sell your franchise business as a going concern;
- negotiating your terms of exit with the franchisor;
- to simply let your franchise agreement expire at the end of the term;
- to agree on a mutual termination of your franchise agreement with the Franchisor upon agreed terms.
Remember, when you sign your franchise agreement, you are signing a binding contract for a specified term and you cannot just decide on your own to exit or terminate that contract.
If you intend selling your franchise business, then you will need to carefully check the transfer provisions contained in your franchise agreement and understand your obligations. This will likely include payment of a transfer or assignment fee which will be a set fee or a percentage of your sale price. Note that the Franchisor may also have right of first refusal to acquire your business.
The Buyer/prospective new Franchisee will also have to be approved by the Franchisor – note the Franchisor cannot unreasonably withhold its consent.
There will need to be a Business sale contract, which will need to be checked by your lawyers to ensure your rights are properly protected.
If you intend exiting before the end of the term of your franchise agreement and are negotiating your terms of the exit with the Franchisor, those terms can be many and varied. Note however that the Franchisor will likely require that you sign a Deed of Termination/Surrender which will include details of your obligations post termination and often include an obligation not to compete in a similar business, in a geographic location, for a specified time.
If you let your franchise agreement expire then most Franchisors will require an agreement to be signed to document your obligations post expiry, which again will likely include non-competition restraints.
Any agreement to mutually terminate the franchise agreement prior to the end of the term will also likely require the parties to enter into an agreement noting the terms of that mutual termination.
Often franchise disputes that cannot otherwise be resolved result in some form of mediation. Often there is an agreed outcome at the mediation which is documented and signed off by the parties and may include the above options.
Part 4 of the Franchising Code of Conduct provides a process for dispute resolution – most well drafted franchise agreements will also have a dispute resolution clause.
Do not be afraid of availing yourself of this process – sometimes the assistance of an independent and knowledgeable mediator can be invaluable to facilitate a resolution.
If you require legal advice,call Christine Matsinger to assist.