Considering cancelling your franchise contract? First check the franchise law of your state and your original franchise contract for appropriate grounds for termination. Typical grounds include a "cooling off period" after the initial franchise contract is signed, force majeure and death of the franchisee. If any of these apply, you may not need to secure the agreement of the other party. Alternatively, consider arranging for the sale of the franchise to a third party instead of cancelling the franchise contract. If these options aren't feasible and you need to write a franchise cancellation contract, there are a few issues to consider.
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Call the contract a "Franchise Termination Agreement" rather than a "Franchise Cancellation Contract" in order to avoid confusion. (In legalese, the term "franchise cancellation" might be misunderstood to mean the unilateral rather than agreed-upon termination of a franchise).
Draft a dissolution provision stating that as of the effective date of the franchise cancellation contract, the franchise is dissolved. All rights granted to the franchisee revert to the franchiser, and the initial franchise agreement is terminated.
Draft a waiver of claims provision that releases each party from liability to the other for acts or omissions before the effective date of the franchise cancellation contract.
Negotiate the franchiser's liability for ongoing royalties. Keep in mind that it is typically difficult for a franchisee to avoid liability for continuing royalties unless the franchiser has committed a wrongful act.
Agree on whether the franchiser should assist the franchisee with its continuing obligations to the landlord under any unexpired lease. The franchisee should also try to negotiate the franchiser's assistance in recovering its financial investment in the franchise (inventory, shop fittings, etc.)
Negotiate a restraint of trade provision. This provision prevents the franchisee from using the franchiser's trade secrets and business methods after termination of the franchise.
Negotiate a non-competition provision. This prevents the franchisee from operating a competing business over a certain geographic area and for a certain time period. The laws of most states restrict the scope of such provisions (for example, a maximum 3-year duration over a 100-mile radius).
Insert standard contract "boilerplate" language such as governing law and jurisdiction; entire agreement; dispute resolution; severability; amendment; notices; and execution and counterparts. Boilerplate samples are widely available on the Internet, but you should modify these sample provisions to fit your particular needs.
Tips and warnings
- If the other party refuses to agree to termination after seriously violating the franchise contract or violating the law, you can threaten a lawsuit and try to negotiate a settlement agreement. This should put you in a good bargaining position.
- Have an experienced franchise attorney look over the draft contract. Although this will cost you some money, it will cost you considerably less than having a lawyer write it from scratch, and a great deal less than the possible consequences of a badly drafted franchise cancellation contract.
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