Is the termination of a franchise thoroughly covered in your franchise agreement?
The one part of the franchise contract which can be heavily weighted in favor of the franchisor, is the franchise termination clause!
It is therefore imperative for the franchisee to have the contract reviewed by an experienced franchise lawyer, to ensure that the provisions contained therein also offers protection to the franchisee, in the event of the termination of a franchise.
Once business commences it may be very difficult to terminate the agreement without being liable for ongoing royalties.
Important Note: If your franchise agreement is terminated by mutual consent with your franchisor, the franchisee must further consider his obligations to his landlord arising from his lease agreement.
Should the business not be on-sold, the franchisee should enlist the help of the franchisor in attemptingto recover as much of his capital investment (shop fitting, signage, stock etc.) as possible.
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The franchisor will have a restraint of trade clause in the agreement, which will come into effect upon the termination of a franchise.
The franchisor will want to protect his trade secrets and business methods and to prevent the departing franchisee from becoming a competitor, whilst the franchisee will want to minimize any restrictions placed on future business endeavors.
Although nobody can be restrained from earning a living in the field of his experience, you may be prohibited from conducting a similar business from the same premises, or within a certain radius from one of the other franchisees in the group.
You will also be prohibited from conducting a similar business anywhere else, if it has the same look and feel and can be associated with the original franchise business. This is quite understandable, but your legal counsel must look out for anything unreasonable which may have a negative impact on your future should you wish to discontinue with the franchise and continue with a similar business.
The nature of the business and the area in which it is being conducted (a densely populated city vs. a small town) will also determine to what extent restraint of trade can be enforced.
A competent franchise lawyer or franchise consulting firm can assist both franchisor and franchisee in the orderly termination of a franchise.
Provision for the termination of a franchise must be made in the franchise agreement and should be favorable and fair to both franchisor and franchisee.