The simple answer is franchisees are required to complete the term of their franchise agreements, however, there are some options to consider.

There are a number of reasons why a franchisee may wish to leave their franchise early including a change of direction, financial reasons or receiving an offer for the purchase of the business. It is  important to consider your rights and obligations as a franchisee so you can make an informed decision.

Your rights and obligations as a franchisee are governed by both your franchise agreement and the Franchising Code of Conduct known as the Competition and Consumer (Industry Codes-Franchising) Regulation 2014. This is a new franchising code that  includes the right of the Australian Securities and Investments Commission (ASIC), to impose both civil pecuniary penalties and issue infringement notices for particular breaches of the Code.

Rights of termination by franchisee

It is highly unusual for a franchise agreement to allow a franchisee to terminate their agreement before the end of the term. Most franchise agreements are for a defined period of say five to 10 years with an option to renew for a further five to 10 years.

The only right of termination a franchisee has under the Code is within seven days of either entering into the franchise agreement or making a payment under the agreement, whichever occurs first. This does not apply to a transfer or renewal of the franchise agreement.

Liability to the franchisor for the remainder of the term

In some instances, a franchisor may agree to allow you to leave your franchise early if you agree to pay an exit fee. This is usually based on the franchise fees that would have been payable for the remainder of the term of the franchise agreement. A franchisor will usually require this to be paid as this covers the fees that they would otherwise have received, had the franchisee completed the full term of the franchise agreement.

Your franchisor may also negotiate on a lesser sum depending on their policies. This is not an option that can be taken lightly and so if this is a path that you are considering it is important to properly communicate with your franchisor. Failure to do so may result in legal proceedings being issued and a damages claim being made against you.

Transfer of franchise agreement

It may be that you have an interested buyer for your franchised business but remember, usually the franchise agreement sets out the process and the Code also imposes certain requirements.

Many franchise agreements will offer the right of first refusal to the franchisor, which means that even if you have an interested buyer, you must first offer the business to the franchisor for the same amount that you have been offered by the interested buyer.

The franchisor can then either take up this offer or provide their consent to the transfer of the business. This consent will be subject to a number of conditions including, but not limited to, that the proposed transferee is able to meet the financial obligations of the franchise and the selection criteria of the franchisor.

There may also be a transfer fee that will be required to be paid by the franchisee. There is a strict process to be followed both under the Code and most franchise agreements and therefore legal advice should be sought before starting this process.

Obligations upon termination, expiry or transfer

A franchisee is subject to certain obligations upon termination, expiry or transfer of an agreement, some of which will continue. These obligations are designed to protect the franchisor’s goodwill.

Restraint of trade

An important provision to be aware of is that your franchise agreement may impose a restraint of trade on you which prohibits you being involved in a competitive business for a certain period following the termination of your agreement, and within a certain area, which is usually the territory outlined in the franchise agreement. This is highly relevant to a transfer of the business which must be a transfer of the franchised business and cannot involve the sale of the business to a competitor.

The relevant period of restraint of trade will usually also apply to franchisees once they have reached the end of a franchise agreement.

Return of franchisor’s confidential information

Once an agreement has been terminated, has expired or transferred it is likely you will be required to return or delete all copies of the franchisor’s confidential information which can include customer lists and operating manuals.

Ceasing to use the franchisors trademark and signage

It is important to remember that your agreement will almost always require you to remove all of the franchisor’s trademark and signage. Failure to do so will likely result in a breach of the franchise agreement.

Exercise of option to purchase assets

It may be that the franchise agreement will allow the franchisor to purchase the assets of the business; the price payable for these assets will usually be the fair market value. This can also include taking over the lease. Some franchise agreements also give the franchisor the first option to take over the lease.

This option often allows the franchisor to either take over the management of the store or require the franchisee to close the store. There is usually a strict process to be followed so it’s wise to seek legal advice if the franchisor elects to do this.

What do I do now?

The first step is to consider the reasons for wanting to leave your franchise early, then identify the options available to you. Above all, it is recommended that you seek legal advice. Due to the strict requirements of both the Code and almost all franchise agreements, together with the new penalty provisions, it is important to ensure you comply with your obligations to your franchisor.