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Terminating Franchise Agreements


What is a Franchise?

According to the International Franchise Association (IFA), a franchise is defined as when:

“[A] franchisor (a person or company that grants the license to a third party for the conducting of a business under their marks) not only specifies the products and services that will be offered by the franchisee (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), but also provide an operating system, brand, and support.”

Some examples of popular franchises in North Carolina include Bojangles, Chick-Fil-A and Lowe’s.

A franchise can be a quick way to jump into the business world. The franchisee operates the franchise, while the franchisor, owns the franchise and receives royalties on its profits.

Franchise Agreements

A franchise agreement is a contract between the franchisor and the franchisee. Some agreements are quite complex in their wording, and it is suggested that you consult with an attorney before signing one.

With any franchise agreement, you should carefully read the document. You should also make note of the termination clause. The termination clause will specify by whom the agreement may be terminated.

Without a material breach of contract, most franchises terminate at the expiration of the contract or if the franchisee declines to renew the franchise options if either is specified.

Termination Clause in Franchise Agreement

A termination clause normally contains statements for either party to be able to suspend performance under the agreement when there is a material breach of contract by the other party or terminate their agreement when a material breach has occurred and not been resolved within a reasonable amount of time.

A material breach can occur when one party does not comply with the provisions of the contract that was signed. This leads to the value of the contract being brought down, as well as one party being deprived of the benefits of the original contract.

The franchisor can typically terminate the agreement if a franchisee:

  • Is convicted of a crime.
  • Loses a necessary license or lease.
  • Fails to pay back royalties.
  • Goes bankrupt.
  • Fails to correct defaults after notice.
  • Fails to follow franchisor requirements regarding location and appearance of franchise.
  • Fails to comply with required operations for the franchise.

Likewise, the franchisee can terminate the agreement if the franchisor:

  • Fails to provide training and support as stipulated in the contract.
  • Commits fraud of misrepresents the potential profits.
  • Fails to protect the franchisee’s business opportunity.
  • Goes bankrupt.

What Happens After Terminating A Franchise Agreement?

The franchise agreement may have contractual obligations after termination is finished or the agreement has expired. The franchisee must:

  • Stop using franchisor’s trademarks and service marks.
  • Agree to a Covenant Not to Complete or a No-compete clause.
  • Pay all outstanding debts.
  • Agree not to use trade secrets.

The franchisor also may have a clause contain the right to repurchase certain inventory that has been branded.

Terminating Your Franchise Agreement

If you are thinking about terminating your franchise agreement before it expires, it would be smart to speak with an experienced attorney.

Maginnis Law’s business litigation attorneys offer free initial consultations to then decide what the next step in terminating your franchise agreement will be.

If you have any questions regarding this blog or potentially terminating a franchise agreement contact Maginnis Law at 919-526-0450 or email us at info@maginnislaw.com. Our firm’s attorneys are still working and will respond as quickly as they can.

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