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Before signing a franchise agreement, you must consider long-term matters as well as short term ones. One of these considerations relates to what you can and cannot do upon the termination of your franchise agreement. If you wish to leave the franchise, a franchisor may impose certain restrictions on your trading abilities in the same industry with a restraint of trade clause. For some guidance, this article will provide some background and explain whether you can leave a franchise and start your own business as a franchisee.

Leaving a Franchise

Once you commit to a franchise, you can only leave it in specific circumstances. When you sign your franchise agreement, you are signing a contract. So, you need to honour what you agreed to do. Consequently, how you end your relationship with a franchise will depend on:

  • what point you are at in the term of your contract, such as its beginning, middle, or end;
  • the terms of your franchise agreement;
  • the conduct of your franchisor; and
  • other factors specific to your industry or business.

As a result, your franchise agreement will likely be your first port of call if you wish to end your time as a franchisee. It may contain a specific clause detailing what situations may give cause to terminate your franchise agreement. 

Otherwise, you may be able to leave a franchise through:

  • cancelling the contract, which you can only do when certain conditions are met, such as the franchisor breaching an essential term of the contract;
  • taking advantage of a cooling-off period;
  • negotiating with your franchisor to end your contract early; or
  • waiting for your contract’s expiry date.

When you sign on to be a franchisee, it is only for a set period of time, such as five years. Once this time is up, your contract may end, and you can leave the franchise. Or, you may have an option to renew your franchise agreement.

Your Obligations When You Exit the Franchise

Furthermore, your franchise agreement will likely contain provisions detailing what you need to do once you leave the franchise. These could include:

  • returning important property, such as client lists or equipment;
  • assigning relevant contracts to the franchisor or the new franchisee; or
  • signing confidentiality agreements.

Whatever the agreement dictates, you will need to fulfil your obligations at the end of your relationship with your franchisor. For some franchises, this may also include honouring a restraint of trade clause.

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What Is a Restraint of Trade Clause?

A restraint of trade clause is a specific provision in a contract. In a franchise agreement, its purpose is to prevent exiting franchisees from using the knowledge they have gained working for the franchise to open a new competing business. Such knowledge may include:

  • confidential information regarding the inner workings of the franchise;
  • intellectual property information;
  • trade secrets;
  • networking contacts;
  • customer lists; and
  • other sensitive information.

Franchisors use restraint of trade clauses to protect their own business interests. Depending on the franchise, they provide franchisees with support and expertise as a part of setup. Therefore, once a franchisee exits, they leave with information that they could use to compete with the original franchise. Franchisors may then include a restraint of trade clause in their franchise agreement to limit what business a franchisee can do after leaving to avoid such competition. This restraint would likely include restrictions on access to the above information and an obligation not to use or share it.

For instance, a restraint of trade clause may say you cannot start a business in the same industry within a certain time period after leaving, or within the same geographical area as the franchise.

Do Restraint of Trade Clauses Affect Me?

In the first instance, a party to a contract cannot enforce a restraint of trade clause. This would include your franchisor. However, they can do so if they meet certain requirements. Your franchisor must show that:

  • they have a legitimate interest in justifying any restraints on you as the exiting franchisee; and
  • such a restraint is necessary to protect their interest, and does not go beyond what is reasonable.

Whether your franchisor has a legitimate interest depends on what exactly they are trying to protect and how their proposed restraints relate to that. This will largely depend on the nature of the franchise itself and how much support they gave you as a franchisee.

For example, suppose the franchise is successful, well-established, and has a nationwide interest. In that case, they may have a legitimate interest to protect their continuing business from competing businesses in the same industry. This is particularly true when competing businesses (such as yours) have insider knowledge regarding their systems and functioning.

However, this is dependent on your unique situation and can become quite legally complex. 

Key Takeaways

If you want to start your own business after leaving a franchise, you should ask a lawyer to review your franchise agreement to determine whether it prevents you from doing so. Your franchisor may have a legitimate interest to enforce a restraint of trade clause, so you need to be careful not to breach any of your contractual obligations once you have signed the franchise agreement.

If you need help with leaving a franchise, our experienced franchising 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 way of structuring a business operation. A franchisor manages the overall company, while franchisees manage business installations in different locations.

What is a restraint of trade clause?

A restraint of trade clause is a contract provision that may limit franchisees’ commercial activity after their franchise agreement has come to an end. For instance, it may limit them from opening a similar business within 50km of another franchise.

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