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Can you abandon a franchise agreement?

On Behalf of | Apr 18, 2023 | Franchise Law |

Franchisees and franchisors both sign contracts that outline the expectations both parties have regarding the partnership. However, things may not always go according to plan. If an insufficient number of customers are coming through the door, the franchisee may start to lose hope and consider closing the business permanently.

Understanding your franchise agreement

Before franchisees abandon the business, they should understand what is at stake. Many franchise agreements require the franchisee to provide a personal guarantee, which may hold them accountable for all contractual obligations.

A personal guarantee may also require the franchisee to keep the company’s trade secrets confidential, pay royalties and other fees, and sign a non-compete agreement. The non-compete clause also prohibits them from working, operating, or owning a business similar to the franchise.

If a franchisee decides to close their firm without following the processes outlined in the agreement, the franchisor may take legal action and impose fines for breach of contract.

Closing the business

Terminating a franchise agreement may offer less risk than abandoning it altogether. However, it may come with expensive exit fees to compensate for the franchisor’s losses, de-branding costs, and other early termination expenses.

A franchise agreement will often have a termination clause which should stipulate under what conditions the franchisor and franchisee can end the contract. For example, it might say that franchisees can terminate the contract if the franchisor fails to provide training and support, commits fraud, or files for bankruptcy.

If you want to end your agreement, notify your franchisor early in writing. Whether you decide to sell the business or end the contract early, consulting with an attorney may help you satisfy the conditions of your contract. Considering that most franchise agreements are one-sided, working with a lawyer may help you avoid expensive legal mistakes and determine the best course of action. Reach out to Zarco Einhorn Salkowski, P.A., today for a free consultation.