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What happens at the end of a franchise agreement?

On Behalf of | Jan 15, 2025 | Franchising

Starting a franchise can seem like the best possible business opportunity. It reduces some of the risks that come with the decision to begin a new company. An entrepreneur buying into a franchise enjoys the benefits of company training and an existing brand with loyal customers. The franchisor often offers local marketing support and helps guide company operations.

There are many costs associated with franchise businesses. From licensing fees to losing a portion of sales, those costs can eventually become a source of friction in a previously functional business relationship. Franchisees may also resent limitations on their potential to expand or rules that prevent them from optimizing what they offer their clients or customers because they must comply with standard franchise practices.

Those running franchises may want to end their agreement and potentially continue running a similar business on their own. Doing so can often be more difficult than many entrepreneurs who invest in a franchise business initially realize.

Contract terms can be restrictive

Businesses offering franchise opportunities often go to great lengths to protect themselves. The agreements signed between franchisees and franchisors include many different terms. They may include very thorough restrictive covenants in the initial agreement negotiated with the franchisee.

It is common to include non-compete agreements that prevent the franchisee from opening a similar competing business for several years after the termination of a franchise agreement. Any attempt to develop a competing brand might result in litigation.

They may also be subject to a non-disclosure agreement that prevents them from sharing information about company recipes or operational practices. Non-solicitation agreements could prevent a franchisee from trying to hire those who work for the franchisor or do business with the companies that patronize the franchise operation. Frequently, franchisees hoping to branch out on their own either need to move into a different industry, relocate geographically or wait a specific amount of time before doing so.

Reviewing the terms of an initial franchise agreement with a skilled legal team can help franchisees determine the best course of action when they are ready to terminate the agreement and start working for themselves. Those hoping to free themselves from the restrictions of a franchise arrangement may need help avoiding violations that could lead to litigation and financial penalties, and that’s okay.