Langley Twigg Law Hawke's Bay

Purchasing a franchise can be an excellent way to own your own business while benefiting from the business model and brand the franchisor has built up. However before entering into a franchise agreement, you should always think “if things do not go as expected, how easy is it for me to exit the agreement?”

There are reasons why a franchisee may wish to exit a franchise. Retirement, a relationship breakdown, new opportunities, a franchisee not being happy with the franchisor’s performance or the financial return on investment. Considering these aspects before entering into a franchise agreement is the best way to ensure a smooth parting of company with the franchisor.

The easiest way to exit a franchise is by selling. This is generally the best way to maximize any return on your investment. However, the shorter the term remaining the lower any possible sale price may be. The sale of a franchise is normally undertaken by entering into an Agreement for Sale and Purchase of a Business. However, typically a franchise agreement enables the franchisor the first right of refusal to acquire the business. Only if the franchisor decides not to take up this right can the franchisee go to the market.

There can be a number of issues when selling a franchise. For example, a franchisor may be required to approve the new franchisee and require a new franchise agreement be signed, possibly on more onerous terms. While consent can not be unreasonably withheld, the ability to meet the franchise payments is not the only consideration. The consent of any landlord may also be required.

Most franchises are for a fixed term (although there may be renewals). Once the term ends, one needs to consider how plant, equipment and stock is disposed of. A franchise agreement may grant a franchisor a first right to purchase, possibly at less than market value. Does the agreement allow the franchisor to take over the existing lease, is there a restraint of trade (from your franchise or the premises of other franchises). These all affect future plans and are all things to watch out for.

Other than through a breach by the franchisor (those breaches need to a sufficiently serious to cancel and dependent on the terms of any agreement), the only other way to terminate an franchise is with agreement from the franchisor. You should not cease the business without complying with the terms of the agreement. Any breach would result in the franchisor terminating the agreement and recovering costs from you. On the other hand, trading while insolvent opens the franchisee up to litigation and personal liability to creditors. Becoming a member of the Franchise Association and taking advantage of the mediation service provided by the Association can be a useful way of negotiating an acceptable exit from the franchise.

When entering into a franchise agreement you must always consider how easy it is to exit the relationship. Doing this at the start ensures that should the unexpected occur, you are in the best possible position to move forward. As always, suitable legal advice can minimize the risks.

By Graham Healey