How To Get Out Of A Franchise Agreement

Do yous want to own a franchise? If then, y'all will demand to enter a franchise understanding. Franchise agreements are legally bounden agreements in which the franchisee is given the legal correct to plant a franchised outlet/concern. Franchise agreements are drafted past the franchisor, and the franchisee is given a template to sign. Notwithstanding, whilst the drafting is in the franchisor's control, the franchise agreement is not set in stone and tin can exist negotiated by the franchisee depending on the relative negotiation power or residue betwixt the parties.

We will be going over the important components of a franchise understanding and how information technology can be negotiated by the parties. Nosotros will also explicate how a franchise agreement can exist terminated or exited past the franchisee. Make sure y'all read until the end, as nosotros will be providing customisable samples of the franchise agreement.

A. What is a Franchise?

First and foremost, what is a franchise?

A franchise is a distribution method involving a franchisor's products or services, which has an established trademark or brand proper noun and a concern system. To establish a franchise, the franchisee pays certain fees and royalties to the franchisor to acquire the right to do business organization under the franchisor'south brand name and system.

The concern of creating and distributing the make and franchising system by the franchisor is called "franchising".

B. What is a Franchise Agreement?

A franchise agreement is a legally binding understanding that governs the relationship between the franchisor and franchisee. Through the franchise understanding, the franchisor grants the right to franchise its business organization to the franchisee.

The franchise agreement establishes rights such as territory, term, minimum performance, franchise services, fees and payment, training provided, intellectual property rights, use of intellectual belongings, and other rights/obligations of the franchisee. In improver, the franchisor usually likewise incorporates an operational manual into the franchise agreement.

C. Types of Franchise Agreement

There are four principal types of franchise agreements/arrangements:

1. Single Unit Franchising

Single unit franchising refers to an agreement in which the franchisor grants the franchisee the right to open and operate ane premise for the franchise business. Typically, this is the starting point for franchise agreements as it enables the franchisee to test the waters.

2. Multi-Units Franchising

If the initial franchise is successful, the franchisee may seek the right to open and operate multiple franchised premises.

3. Territorial Development

This is a grade of multi-unit franchising in which the franchisee is given a territory to develop a certain number of units within a period. The organisation is exclusive, which means no other franchisee can be granted the same territory during this fourth dimension. However, the franchisee may lose its exclusivity if it fails to run into certain milestones in developing the territory every bit required under the franchise agreement.

4. Chief Franchise

A main franchise is an expanded type of territorial development franchise where the franchisee not only has the right to operate franchise units in the territory simply to sell the franchise rights to others in the territory. In this sense, the primary franchisee is a sub-franchisor, bearing many rights and responsibilities of the franchisor to the franchise unit in the territory, such equally providing support and preparation in the territory. As a sub-franchisor, the primary franchisee collects fees and royalties from franchisees in the territory.

D. How does a Franchise Agreement work?

1. For the Franchisor

The franchise understanding is the most important legal document as it enables the franchisor to manage and define the legal relationship betwixt the franchisor and the franchisee. Through the agreement, the franchisor can grant the franchisee the legal correct to constitute and develop their franchise position; in plow, the franchisee volition assume the obligation of establishing and maintaining its franchise business in compliance with the requirements of the organisation set by the franchisor (as set out in the operational manual). The franchisee is besides required to pay franchise fees and ongoing royalties to the franchisor.

2. For the Franchisee

As an investor in the franchise concern, the franchisee should ensure that the franchise agreement includes all promises and representations from the franchisor. The franchisee should too ensure that it details the proper help, back up, and training he will receive from the franchisor to help the franchisee set up and run the franchise business successfully.

East. Contents of Franchise Understanding

A typical franchise agreement contains the following clauses:

1. Grant and Reservation

The franchise agreement typically begins with a grant of the franchise and any reservations past the franchisor. The franchised right is commonly a limited, non-transferable, non-exclusive correct to use the franchisor's name, trademark, logo, and other intellectual property subject to the following restrictions:

It is a franchised business;
It is being used at and from the premises;
Information technology is within the territory;
It is under the permitted name/trademark; and
It is used following the organization and the operating manual of the franchisor.

two. Term and Minimum Requirements

The franchise agreement should set out the minimum requirements and milestones for the franchisee to meet within the period in the territory. This could include, for example, the number of locations to exist opened, the plan of the unit to be approved, the minimum sales target, etc. This section may besides specify other equipment or information technology systems that must exist installed as an operational requirement.

3. Franchise Fees and Royalties

Another important particular to ready out in the franchise agreement is the number of initial franchise fees and ongoing royalties to be paid by the franchisee to the franchisor. In addition, there may be other expenses such as training fees or advertizing fees, which are to be borne past the franchisee.

iv. Services to be provided by the Franchisor

In exchange for the diverse franchisee fees, royalties and expenses, the franchisor should provide certain services to the franchisee, including help with the setup/opening of the franchise, advising on the plan layout and equipment, training staff, supply of goods, seminars, post-opening services, marketing, etc.

five. Intellectual Property

The franchised right granted is a license to the franchisee and non a transfer of ownership right over the intellectual belongings by the franchisor. The franchisor will therefore accept to define each item of its proprietary intellectual property, confidential information and trade secrets in detail and explain the restrictions on the franchisee's right to employ them in the franchised business concern. This is of import for the franchisor to protect the brand value of its business.

6. Quality Control

The franchisor will usually specify sure quality control requirements for the franchisee to comply with. This is necessary to maintain the quality of the make and ensure that the goods and services provided past the franchisee come across the minimum standards of the franchisor.

vii. Sale of Franchised Business organisation

The right of assignment in most franchise agreements is restricted and would require the franchisee to seek the consent of the franchisor earlier the franchise can be sold or assigned. In many cases, the franchisor is given the right of first refusal to acquire the business on the same terms and price equally the 3rd-political party purchaser.

8. Restrictions on Franchisee

The franchise agreement volition generally include certain restrictions on the franchisee, including a prohibition on the franchisee from opening a competing business with the franchise business in the territory.

Other restrictions on franchisees may include:

not to embark operating the business until the franchisor's approval;
not to operate the business at any location other than the approved bounds;
not to sell, assign, transfer, accuse or sub‑license the business concern;
not to utilise or publish whatsoever advertisements without the franchisor's approval;
non to conduct business concern outside the territory;

These restrictions usually last for at least one year after the termination of the agreement.

9. Human relationship between the Parties

This is a mutual clause that clarifies the relationship between the parties in the franchise agreement. Note that the franchisee is not an amanuensis, employee, or partner of the franchisor but an contained contractor. This means the franchisee is responsible to pay taxes, conduct his ain business, and agree full responsibility for its employees and insurance.

10. Breach of Contract Limitation of Liability

Well-nigh franchise agreements (in favour of the franchisor) limit the liability of the franchisor in the case of a breach of contract. Nevertheless, the liability of the franchisee tends to be unlimited. In addition, the franchisee will indemnify/compensate the franchisor for any losses suffered arising from the breach of contract past the franchisee. While this may seem unfair on the surface, it is non necessarily so, as the franchisee is responsible for the daily operation and maintenance of the business organisation, non the franchisor.

11. Termination of Franchise Agreement

Depending on the 'seriousness of the breach (whether the breach goes to the root of the contract), a breach of contract may not allow the innocent party to terminate the contract. For more details, please refer to our blog post on this subject - https://docpro.com/blog/terminate-contract-alienation

The parties may likewise list other events which trigger a termination of the franchise agreement, for instance, if there is a material change in the direction ownership/control of the franchisee, if parties get insolvent, if the franchisee is given a cooling-off period, or if there is a alter of mind without reason.

12. Governing Law and Dispute Resolution

The franchise agreement will stipulate the governing law undermining the contract; this is ordinarily the police force of the territory of the franchised business (where the dispute has arisen). For dispute resolution between the franchisor and the franchisee, the parties typically agree to a face-to-face meeting or arbitration before resorting to courtroom or mediation.

Negotiation between the parties tends to be the quickest and nigh cheap way to resolve a dispute, followed by mediation and arbitration. Going to court is the nearly expensive and can drag on for years.

xiii. Boilerplate Clauses

A typical franchise agreement template would also include sample average clauses that can be constitute in most agreements. For example, no assignment, reservation of rights, waiver, severability, notices, force majeure, unabridged agreement, amendments, and rights of third party, etc.

For a comprehensive list of average clauses, y'all can check out our customisable document here: https://docpro.com/doc303/general-boilerplate-document-standard-understanding

14. Examples of Franchise Agreement Templates

We created half dozen different types of franchise understanding templates, all of which cater for different situations. In addition to the two-political party versions betwixt the franchisor and the franchisee, nosotros likewise created tripartite franchise understanding templates between the franchisor, the franchisee, and the master, where a master (usually an individual) guarantees the obligations of the franchisee.

Version	Franchise Agreement (ii Parties)	Franchise Agreement (with Principal)
Franchisor	https://docpro.com/doc1786/franchise-agreement-franchisor	https://docpro.com/doc41/franchise-agreement-with-principal-franchisor
Neutral	https://docpro.com/doc1785/franchise-agreement-neutral	https://docpro.com/doc37/franchise-agreement-with-principal-neutral
Franchisee	https://docpro.com/doc1787/franchise-agreement-franchisee	https://docpro.com/doc42/franchise-understanding-with-principal-franchisee

F. How to Negotiate a Franchise Agreement?

About franchisors will tell their franchisees that the franchise agreement is non-negotiable and operates on a accept it or leave it footing. This may or may not be true, depending on the relative bargaining ability of the franchisor and the franchisee. For example, if the franchisor is McDonald's, then the room for negotiation is very limited compared to a new franchisor that needs franchisees.

The following are the most negotiated terms in franchise agreements:

1. Territorial Brake

The territorial purlieus of the franchise is commonly negotiated. Information technology should be clear which metropolis or territory is covered by the franchise, particularly if the franchise is exclusive. Parties should avoid setting a distance as to the limits of the boundaries of the franchise, as this volition probable create dispute down the line.

Another restriction that tin be negotiated is whether the franchisee is permitted to sell online and whether if the online client lives outside of the territory, the franchisee can withal sell; vice versa, what if another franchisee infringes an exclusive territory, would the franchisee have any recourse against the franchisor?

2. Representations of the Franchisor

The promises, representations and warranties made by the franchisor and relied on by the franchisee should exist included in the franchise agreement. If the representation goes to the eye of the contract, it should be treated as a condition that allows the franchise agreement to be terminated if breached. It is as well a good defence should the franchisee fails to meet any milestones or targets nether the franchise agreement.

3. Restrictions on Franchisees

Most restrictions imposed past the franchise agreement on the franchisee are unduly restrictive. For instance, the restriction to prepare upwardly a competing business in a territory could be disproportionately wide in terms of expanse and duration. The franchisee should negotiate with the franchisor on something more reasonable.

4. Property of Assets

The franchise agreement should clarify to who the property rights of various avails or equipment vest. Where these assets or equipment are provided past the franchisor to the franchisee and paid for as part of the franchise fee, ownership and entitlement should exist made clear.

5. Timing and Payment of Franchise Fee

The initial franchise fee and ongoing royalty may exist negotiable. In improver, if the timing for payment by the franchisee is tight, but the timing of provision of service by the franchisor is loose, the franchisee can seek to negotiate timing to buy more than fourth dimension.

half dozen. Limitation of Liability

Some other mutual unfair term is that the liability of the franchisor is limited, whereas the liability of the franchisee is unlimited, extending to the personal liability of the principal. The franchisee can seek to negotiate a fairer franchise agreement by making these unequal terms reciprocal. For instance, if at that place is a liability cap on the franchisor to the corporeality of the franchise fee, and so the same cap should employ to the franchisee.

7. Right of Get-go Refusal

Should the franchisee wish to exit the franchise through a sale, the franchise agreement by and large restricts such sale to exist bailiwick to the consent or the first right of refusal of the franchisor (i.e. the franchisor has the correct to buy first the franchise at the same toll and terms equally the third party). Such consent should non be unreasonably withheld, and whatsoever correct of starting time refusal should lapse after a reasonable flow.

The franchisee could also seek a correct of first refusal to purchase out whatsoever franchise within its territory based on reciprocity.

viii. Breach and Termination of Agreement

Penalties for late payment of franchise fees by the franchisee may be excessive, whereas whatsoever alienation of the franchisor's obligations carries fiddling to no penalties. In addition, the termination provisions may provide for termination for a minor alienation of contract by the franchisee, whereas the franchisee has no right to cease against fifty-fifty a major breach by the franchisor. Again, the franchisee should seek to negotiate these provisions with the franchisor to ensure proportionality and fairness in the franchise agreement.

9. Dispute Resolution

If the governing law and jurisdiction of the franchise agreement are selected equally the jurisdiction of the franchisor instead of the territory of the franchise (if unlike), the franchisee should negotiate with the franchisor on this point to ensure that common sense prevails. Given most elements of the disputes are likely to arise from the franchised territory, it is the most convenient forum for dispute resolution.

In improver, the franchisee should ensure that whatsoever dispute will be dealt with in a fair, price-effective, and timely manner, such as first going through high-level negotiation or mediation.

G. How to terminate a Franchise Agreement

About franchise agreement templates are in favour of the franchisor, which means that the franchisor can terminate the franchise agreement where the franchisee has breached the terms of the franchise understanding (however minor) or failed to see sure milestones.

Notwithstanding, it is relatively difficult for a franchisee to terminate the agreement without compensating the franchisor with many franchise fees, even if the franchise business organization is not as successful as expected. Beneath are some ways franchisees may be able to terminate the franchise agreement early:

ane. Alienation of Contract

Not every breach of contract by a political party gives the other party a right to terminate the franchise agreement. Unless the breach is expressly included as a terminable issue in the franchise understanding, the breach will demand to be significant enough to exist a major breach that goes to the root of the understanding (i.east., alienation of a condition of the agreement).

The innocent political party should requite the defaulting party a reasonable period to remedy the breach, which, upon failure, the innocent party would have the right to finish the franchise agreement. A pocket-size breach that does non go to the root of the agreement will simply be a alienation of a status and the appropriate remedy amercement.

2. Cooling-off Period

In certain jurisdictions, the franchisee is allowed a cooling-off period (7 – 30 days), during which information technology can terminate the franchise agreement without providing reasons. This is to prevent the franchisee from being lured into an unscrupulous franchise system with long-term payment obligations without thinking information technology through.

So, this is what y'all demand to know about terminating a franchise understanding:

How to cease a franchise during a cooling off period?

With a cooling-off period agreed between Franchisor and Franchisee, either political party may end the Franchise Agreement without penalisation discipline to a written notice and payment of outstanding fees to the franchisor [ane].

How to terminate a Franchise Understanding if no cooling-off period is agreed?

In the absence of a cooling off period, a Franchise Agreement can still be terminated with the consent of both parties. There may, withal, be costs incurred in this case, so both parties should be prepared for potential liability[two] .

3. Sale of Business organisation

If the franchisee wishes to sell its concern, the franchisor shall non unreasonably refuse to consent to the auction. The franchise agreement will usually stipulate the atmospheric condition for sale, such as the right of first refusal. If the franchisee follows the relevant notice requirements and the franchisor does not exercise its right of showtime refusal within a particular menstruum, the franchisee is generally free to sell its business organisation.

4. Walking Away without Clause

Either party shouldn't abandon the franchise without a clause fifty-fifty if the franchise business organisation is unsuccessful, equally the potential liability could be even bigger (similar breaking a lease which the landlord could merits for all the unpaid rents under the lease from the tenant). It should only be considered by the franchisee where the liability is limited (if the franchisee is a limited visitor with no master guaranteeing its liability on a personal basis, then one could consider walking away and winding upward the company).

[1] Andrew Pickett, Trial Attorney, Andrew Pickett Police force , PLLC

[2]Andrew Pickett, Trial Chaser, Andrew Pickett Police force, PLLC

Delight note that this is a general summary of the position nether common law and does not constitute legal communication. Every bit the laws of each jurisdiction may be different, you may want to speak to your lawyer.

Source: https://docpro.com/blog54/how-to-draft-negotiate-and-terminate-a-franchise-agreement