For many entrepreneurs, signing a franchise agreement is the beginning of an exciting adventure. But what happens when things get complicated and conflicts arise? Knowing how to act and anticipating problems can make the difference between an orderly closure and a long and costly process.
Termination or Rescission? They’re Not the Same
Although they are sometimes confused, these concepts have important nuances:
Termination: This occurs when one of the parties seriously breaches their obligations. For example, if the franchisee stops paying royalties or the franchisor fails to provide the promised support.
Termination: This is usually due to external causes or flaws in the contract from the outset, such as deception, serious errors, or undue pressure.
In the world of franchising, termination for breach is the most common.
Situations that typically end in termination
- Breach of essential obligations: If the franchisee fails to respect the brand image, sells unauthorized products, or stops paying, the franchisor can terminate the contract and claim damages.
- Lack of support from the franchisor: When the franchisor fails to provide training, product delivery, or operational support, the franchisee may have grounds to terminate the contract.
- Non-compliance with regulations: If either party ignores licenses, safety standards, or industry regulations, they may be exposed to penalties and termination of the contract.
The non-compete clause: how does it affect you?
This clause protects the franchisor from preventing the franchisee from setting up a similar business using the acquired know-how. It is valid if it is reasonable in time (usually one to two years) and scope. If an excessive restriction is imposed, it could be challenged.
If the contract ends and the franchisee wishes to remain in the sector, it is essential to carefully review this clause and, if in doubt, seek advice.
How to avoid unexpected compensation?
- Review the contract carefully: Before signing, carefully study the clauses regarding duration, early termination, penalties, and non-competition. Good advice can save you a lot of trouble.
- Document everything: Keep emails, faxes, and any relevant communications. If a problem arises, having clear evidence is essential.
- Negotiate before litigating: Many times, amicable negotiations avoid long and costly lawsuits. Don’t hesitate to seek out-of-court settlements if possible.
- Plan the closure: If you see that the relationship is about to end, prepare in advance for the closure of the premises, the return of materials, and the settlement of accounts. This will avoid misunderstandings and potential claims.
Real example: learning from experience
Imagine you are a franchisee and, after months of lack of support and delays in product delivery, you decide to terminate the contract. By documenting each incident and formally reporting your claims, you can avoid compensation and close the store in an orderly manner.
Or consider the case of a franchisor who discovers that one of its franchisees is secretly opening a similar business. By having a well-drafted non-compete clause and proof of breach, they can terminate the contract and protect their brand.
Frequently Asked Questions (FAQs)
What happens if I breach the non-compete clause?
You may face financial claims and, in some cases, the obligation to close the new business.
Can the termination of the contract be negotiated without going to court?
Yes, and it is the most advisable option. An amicable agreement is usually faster and less costly for both parties.
How long does the non-compete clause last?
The usual term is between one and two years, but it must be well justified and not excessive.
Is legal advice necessary before terminating a franchise agreement?
It is always advisable. A specialized attorney can help you avoid mistakes and protect your interests.
Conclusion: Prevention is your best ally
Terminating or terminating a franchise agreement isn’t just a matter of ending a business relationship. The financial and legal consequences can be significant. Therefore, planning ahead, securing sound advice, and documenting every step is the best way to protect your business.
Do you have questions about your franchise agreement?
At Cardador & Marín Abogados, we can help you review, negotiate, or terminate your agreement so you can focus on what really matters: growing your business with peace of mind.