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Franchising is a great way to get into business as you buy or open a business that already has brand recognition. This allows you to skip the initial foundation marketing phase of your business. However, franchises do not always go as well as you had planned. This article will explain what a franchise agreement is and whether you can terminate a franchise agreement that you are losing money on. 

What is a Franchise Agreement?

A franchise agreement is a legally enforceable contract that facilitates and sets out the relationship between the franchisor and the franchisee. It is a vital component of any franchise arrangement as the responsibilities and obligations of both parties are clearly outlined. We will look at some of the key clauses included in the franchise agreement below. 

Dispute Resolution Clause

A dispute resolution clause outlines the process that the franchisee and franchisor have to go through if there is a dispute between the parties. The dispute resolution clause will usually require both parties to go through either a mediation or negotiation process to solve any disputes. This helps both parties save time and money. If this fails, then the parties are able to initiate court proceedings. Both parties must follow dispute resolution clauses if they are in the franchise agreement.

Intellectual Property Clause

Another clause that is commonly found in franchise agreements is an intellectual property clause. This clause will determine how the franchise’s intellectual property can be used by the franchisees. An integral part of franchising is the use of the franchise’s branding. Therefore, there needs to be a clause that governs how this is used. This clause will usually state that a franchisee can use any franchise branding in accordance with a particular set of conditions. These conditions might include a statement that bars any customisation of the branding without the prior permission of the franchisor. 

Suppliers Clause

A suppliers clause will outline which suppliers a franchisee should use for their business. Because franchises are serving the same product, it is vital that there is consistency between the franchisees. One way that this can be done is by ensuring that all franchisees use the same supplier. If all the franchisees are buying from the same supplier, then they may be willing to give a discount.

How to Terminate a Franchise Agreement?

You will usually not be able to terminate your franchise for the sole reason that you are losing money. However, there are options available if you need to cancel your franchise agreement.

Termination Clause

Most franchise agreements will contain a termination clause. A termination clause allows both parties to cancel the agreement in certain circumstances. These circumstances are usually when either party breaches the contract. If this happens, then the other party can cancel the agreement and both parties are under no further obligation under the contract. The person who breached the contract can still be liable for damages for any loss that they caused. 

Talk to Your Franchisor

Another option you should take is to talk to your franchisor. If you are losing money, your franchisor may be able to give you some help to start bringing in more revenue. Alternatively, they may put a temporary pause on any franchise fees you have to pay to them. At the end of the day, your franchisor does not want to see you fail, so they will do everything in their power to stop this.

Sell Your Franchise

If you think you will be unable to save your franchise, you should consider selling it. Even though your franchise is running at a loss, there maybe someone out there who thinks they can bring it back into a successful business. However, you should be prepared to sell the business at a loss as it is unlikely you will receive more than what you paid for a failing business.

Key Takeaways

When buying a franchise, it is important that you have a well-written franchise agreement. The franchise agreement will outline your rights and responsibilities as well as certain processes. There may be a situation where you are losing money and want to terminate the franchise agreement. This can only be done with the permission of your franchisor or under one of the other permitted reasons. Alternatively, you can try to sell your franchise. For legal assistance with franchising, contact LegalVision’s New Zealand franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What happens if I activate the termination clause incorrectly?

You could be found to have breached the contract yourself and could be liable for damages.

Can I sell my franchise to anyone?

No, most franchise agreements will indicate that the franchisor must approve of any new owner of a franchise.  

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