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Terminating a franchise agreement before its expiration

On Behalf of | Aug 7, 2021 | Blog, Commercial Litigation |

Some of the reasons that may cause a franchisee to decide to terminate a contract prior to its expiration include fraud or misrepresentation. Franchisors providing false or misleading financial statements may have engaged in deception, as noted by Franchise Gator.

Under the Federal Franchise Rule, companies must provide prospective buyers a Franchisor Disclosure Document no less than two weeks before signing an agreement. The Federal Trade Commission notes that line 19 of the FDD must provide an accurate portrayal of a franchise’s sales or earnings.

Discovering that the FDD does not contain sufficient information

Franchisors may not provide potential buyers any other financial information that does not show on the FDD’s line 19. For example, a representative may not speak about revenue projections unless those figures already appear in the FDD.

An exception, however, exists when a franchisor sells an existing unit or provides information about an established location. Financial statements may include a unit’s performance during a particular timeframe such as during a busy holiday season.

Selling a franchise to another interested party or to the franchisor

If operating a franchise causes a significant financial loss, franchisees may find a way to assign or transfer an agreement to another individual. According to Franchise.com, some contracts may require franchisees to sell a unit back to the franchisor at a specified rate.

As reported by Entrepreneur magazine, agreements containing the first right of refusal provision give franchisors the first-in-line privilege to buy business-related assets from franchisees upon terminating a contract. Before selling, however, franchisees may wish to gather evidence to document problems related to a franchisor’s business model.

Some franchise agreements appear to favor franchisors with clauses specifying a legal action for a breach of contract. By selling their units, franchisees may have an option to remove themselves from a problematic business model.

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