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Buying a franchise is a great and easy way to get into business without the hassle of starting from scratch. A franchise is an agreement in which a business (‘the franchisor’) licences their business plan, intellectual property and model to another individual or business (‘the franchisee’) in exchange for payment through periodic ‘franchise fees’. However, sometimes you, as the franchisee, may change your mind after buying into a franchise. Depending on your franchise agreement, there are usually a few ways that you can get out of your contract after signing it. This article will explain the: 

  • legal implications of buying a franchise; and
  • ways that you can get out of the agreement after signing the dotted line. 

Cooling-off Period

Most franchise agreements in New Zealand will include a ‘cooling-off period’. This clause allows you to withdraw from the agreement within a specified time period after signing the agreement. Generally, you will be entitled to withdraw seven days after:

  • making a payment under the agreement; or
  • signing the agreement 

You must include a cooling-off period clause in your franchise agreement to become a member of the Franchise Association of New Zealand (FANZ). Therefore, as most franchisors are members of FANZ, most franchise agreements will include this clause. 

Termination Clause

If your franchisor has broken their obligations under the franchise agreement, this will entitle you to terminate the agreement. Breaches of the franchise agreement will usually occur sometime in the franchise’s operation. However, there may be cases where franchise agreements are broken relatively quickly. 

For example, if the franchise agreed to provide your staff with training prior to opening the franchise and this was not undertaken, you will be entitled to terminate the agreement. However, the burden is on you as the franchisee to prove that the franchisor has broken their obligations under the franchise agreement.

It is rare for a franchisee to use the termination clause provision. Most franchise disputes can be resolved through dispute resolution practices such as mediation. If you are in a franchise dispute, it is a good idea to hire a mediation lawyer to help. 

Franchisor’s Consent

You can also withdraw from a franchise agreement with the consent of your franchisor, if allowed for in your agreement. To obtain the consent of your franchisor, you may have to pay a cancellation fee or you may be obligated to aid in the training of a future franchisee. Any requirements will be set out in your franchise agreement or other accompanying documents. 

Assignment of Franchise

In very limited circumstances, you may be allowed to assign the franchise to another party. An assignment allows you to transfer all the rights and obligations of the franchise to another individual or business. They then become the new franchisee. Most franchise agreements will not allow for this, so it is extremely important that you read your franchise agreement carefully. If you assign your franchise when it is not allowed in your franchise agreement, you may be liable to legal proceedings. 

Obligations After Withdrawal From Franchise Agreement

If you successfully withdraw from a franchise agreement, there may still be continuing obligations that you will have to follow. It is common for there to be clauses in franchise agreements that disallow certain practices after you withdraw from your franchise agreement. 

For example, the franchise agreement may include a restraint of trade clause. Commonly found in employment agreements, a restraint of trade disallows you from starting or owning a business in either the same:

  • area; or
  • Industry.

Most restraint of trade clauses will have a time period in which the clause will expire. The restraint of trade clause is there so that you cannot take the skills that you learnt whilst owning the franchise and use them as a competitor. If you wish to withdraw from your agreement before you have started the operation of your franchise, then you may be able to discuss waiving this clause with your franchisor.

Key Takeaways 

Before buying a franchise in New Zealand, make sure you are 100% sure that you want to go down this path. In the event that you want to withdraw from your franchise agreement after signing, you may have a few different options to either:

  • communicate with your franchisor that you want to withdraw from your franchise agreement whilst in the ‘cooling-off period’; 
  • gain the consent of your franchisor to withdraw from your franchise agreement. This may involve mediation;
  • withdraw through the termination clause of your agreement; or
  • if your franchise agreement allows for it, assign your franchise to another entity.

The best practice is to always stay in communication with your franchisor and outline your situation if you feel as if you need to withdraw from your franchise agreement. If you are wanting to withdraw from your franchise agreement or are looking to buy a franchise, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can you change your mind after signing a franchise agreement?

Yes, you might be able to change your mind after signing a franchise agreement. There are several different avenues you may have, such as withdrawing during the cooling-off period or withdrawing with the franchisor’s consent.

Can you assign your franchise?

You are only allowed to assign your franchise if your franchise agreement allows it. Most franchise agreements will not allow for this, so it is important that you review your agreement carefully.

Are there any obligations post-withdrawal?

Depending on your agreement, you may be bound by a restraint of trade or other similar clauses. Again it is important that you review your franchise agreement carefully. 

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