How to Get Out of a Franchise Agreement
Entering into a franchise agreement is an exciting venture. You have the opportunity to run a business without having to build it from the ground up, getting the benefit of an established client base, marketing, operational organization, and goodwill of the customer base. Unfortunately, even successful business models do not always work in all locations. If you find yourself running a failing franchise, how can you get out of your contract? Continue reading for advice on getting out of a franchise agreement, and contact a knowledgeable Houston business law attorney if you need assistance with a Texas business law matter.
Termination Clauses in a Franchise Agreement
Franchise agreements typically include termination clauses that specify when and how either party can end the franchise agreement. Typically, a termination clause will allow a party to do one of the following whenever the other party to the agreement has committed a material breach:
- Suspend performance of the party’s duties under the agreement until the material breach has been rectified
- Terminate the agreement entirely, if the breach has not been rectified within a reasonable time after a demand for resolution has been made (and assuming resolution is possible given the nature of the breach)
What is a Material Breach?
Like most contracts, franchise agreements can be suspended or terminated whenever one party to the agreement has “materially breached” the terms of the agreement. A material breach occurs when a party fails to comply with the terms of the agreement in such a manner as to materially devalue or dismantle the value of the contract, deprive the other party of the benefit of the contract, or prevent the other party from performing their side of the contract.
In a typical franchise agreement, the franchisor can likely suspend or terminate a franchise agreement whenever the franchisee does any of the following:
- Commits a crime
- Fails to pay its royalties
- Goes bankrupt
- Does not comply with the business operations as specified in the agreement
- Loses or fails to obtain a license, lease, or other governmental approval to run the business
- Goes outside of their territorial limitations as specified in the agreement
Likewise, a franchisee can likely terminate a franchise agreement when the franchisor has done any of the following:
- Fails to provide training and support as specified in the contract
- Goes bankrupt or becomes insolvent
- Fails to protect the franchisee’s territory or business opportunity as specified in the contract
- Commits fraud or other misrepresentations concerning potential profits, disbursements, and other important financial information
Not all franchise agreements include termination clauses that specify when a franchisee is permitted to terminate, but under the principles of contract law, any party can terminate a contract when the other party has committed a material breach, regardless of whether it is stated in the contract. Additionally, if you retain the services of an effective business law attorney upon negotiating your initial agreement, you will be sure to have a termination clause upon which you can rely should the franchisor break their side of the contract.
Find a Buyer
Outside of terminating the contract for cause, if a franchisee is looking to get out of a franchise agreement, the franchisee can look for a buyer. This is likely easier said than done. Finding a buyer may be difficult if the business is struggling, and sale of the franchise rights is likely subject to approval by the franchisor as well as the payment of transfer fees as provided for in the contract.
If you need legal assistance with a Texas business matter, contact the dedicated and detail-oriented Texas business lawyer Leigh Meineke at the Houston offices of Stephens | Domnitz | Meineke PLLC by calling 832-706-0244.