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As a franchisee, you may come to a point where your franchise membership is no longer benefiting you. What can you do in this situation? This article will provide some background and explain when you can leave a franchise.

How a Franchise Works

As a franchisee, you join a franchise to run a business that imitates the franchisor’s original business. You agree to do this in a particular location for a specific period of time, all of which you and your franchisor agree on at the beginning of your relationship. Commonly, this term can last from five to seven years, but this is up to both parties to the contract. During this time, you gain rights to run your business according to the franchise’s system.

Common examples of franchises in New Zealand include KFC and McDonald’s, New World and the Coffee Club.

The exact rules of a franchise vary according to each franchisor’s system. However, these rules that you have to abide by should be set out in important documentation to refer to when needed. These include the:

Only the franchise agreement is required in most cases. If you want to leave a franchise, this document will be fundamental to that process.

Why You May Want to Leave a Franchise

As the above paragraph details, you agree with your franchisor to be a franchisee and commit to the business for a set time. However, you may find that you want to leave the franchise before this term is over. Some reasons for this could include:

  • wanting to go into business for yourself, under your own name;
  • the term for your agreement being too long;
  • disputes with the franchisor or other franchisees;
  • external reasons to the franchise relationship, such as personal circumstances;
  • the franchisor not keeping up their end of the deal;
  • the franchisor failing to provide you with necessary support and guidance;
  • a lack of training and assistance from your franchisor;
  • the franchise model becoming outdated and not within your interests;
  • the franchise location not being suitable for you anymore; or
  • other applicable reasons.

Whatever the cause for your desire to leave the franchise, it may play into whether you can leave the franchise at all. There are only set circumstances where you can legally end your relationship with your franchisor.

When Can I Leave a Franchise?

If you want to leave the franchise, your franchise agreement is the first place to check. In this essential document, there may be clauses that detail what you can do as the franchisee if you wish to terminate your agreement with your franchisor. Typically, this would only be in very specific situations, such as market changes leading to the franchise not being viable anymore. Additionally, this would need to be a provision you negotiated with your franchisor when you signed the original agreement. You may also need to give notice for this process.  There may also be an early exit fee to remove yourself from the network.  Unfortunately, there may be no easy way to terminate the relationship unless explicitly negotiated at the beginning of the franchise relationship.

All franchise agreements will contain termination clauses that detail when the franchisor can end your relationship, usually due to some fault or misdemeanour on the franchisee’s part.

However, many franchise agreements do not have specific clauses detailing when a franchisee can leave the franchise. In addition, there are often post-termination restraints that make it difficult to operate the same kind of business from the same premises post-termination. Therefore, you must rely on other avenues to end your agreement with the franchisor. 

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How Can I Leave a Franchise?

There are different ways you may end your relationship with your franchisor, thus resulting in you leaving the franchise. However, you need to ensure you meet the requirements of each before you can use them.

Terminating Your Contract Based on Breach by the Franchisor

Legally, you can cancel your contract with another party if certain conditions are met. In particular, if your franchisor misled you or did something fraudulent to get you to sign your franchise agreement, this may be such a circumstance. Another is if your franchisor breaches an essential term of your franchise agreement in some way to your detriment or makes it clear that they will not meet their obligations, such as providing essential and agreed ongoing support. This can be a complex legal process, so seek legal advice if this is your situation.  

Cooling Off Period

If your franchisor is a member of the Franchise Association of New Zealand (FANZ), they must include a cooling-off period clause in your franchise agreement. As a result, you would gain the ability to terminate your franchise agreement within seven days after you sign. You may also receive a refund if you paid a deposit when entering the original contract.

Mutual Agreement

This avenue will depend on your franchisor, but you may be able to agree on you leaving the franchise. You would have to draw up a new contract outlining the terms of the end of your relationship. You may also have to pay an early termination or cancellation fee.

Expiry Date

All franchise agreements have an end date. If this date is coming up, you could just wait until your obligations to your franchisor end as it passes. However, your franchisor may wish to negotiate an extension, so it is up to you whether you continue or not.  In addition, you will need to address the issue of any restraint should you wish to operate in the same industry after the termination of the agreement.

Key Takeaways

There are various ways that you can leave a franchise as a franchisee. However, you need to meet the conditions of those different avenues. These will depend on both your franchise agreement and your franchisor.

If you need help with leaving a franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is a franchise?

A franchise is a business model that you may use to grow your business. You, as the franchisor, allow other parties, the franchisees, to replicate your business operations to create their own success. In return, you grow your brand and receive various fees or royalties.

When can I leave a franchise?

There are limited circumstances that allow you to leave a franchise as a franchisee. You should check your franchise agreement or try to come to a mutual agreement with your franchisor about terminating your contract.

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