Entrepreneurs and investors may decide to start franchises because it minimizes the effort required to open a new business. Instead of building a brand from the ground up, they essentially buy into an existing organization. The franchise approach can streamline the startup process, but it can also prove very expensive. Franchisees pay quite a bit for their right to use an existing company’s brand.
Especially in scenarios where the brand in question loses its luster with the local community or the franchise or fails to follow through with local marketing requirements, the franchisee may start thinking about ways to sever their ties to the company if it struggles financially.
Is it possible to end a franchise agreement to eliminate franchise fees and improve a company’s solvency?
Franchisees often make major concessions in contracts
A review of the initial franchise agreement often makes it quite clear that simply ending the franchise agreement and continuing to do business under another name is likely not possible. Typically, there are numerous post-termination obligations that limit the options available to the franchisee. For example, they may have signed a non-compete agreement that prevents them from opening a similar business in the same market for several years after ending the franchise agreement.
Although there have been some attempts to eliminate non-compete agreements at the federal level, those changes did not include franchisee-franchisor contracts but rather employment arrangements. The non-compete ban was struck down by a judge earlier in the year, but even if it remained in place, non-compete agreements that apply to franchisees would still be enforceable. Franchisees may have also signed non-disclosure agreements that prevent them from sharing recipes or processes used by the franchise business to duplicate the products or services that the company offers.
There may be workarounds to this frustrating situation, but franchisees risk intense scrutiny if they move on to new business endeavors after a poor outcome in an attempt to run a franchise. They may end up embroiled in costly litigation if the franchisor accuses them of breaching their initial agreement. Reviewing a franchise agreement with a skilled legal team can be a good starting place for those concerned about finding a new stream of revenue when a franchise proves less profitable than anticipated.