For franchisor and franchisee alike, the termination of a franchise relationship (i.e., where the franchise agreement is cancelled) requires planning, a thorough understanding of the franchise agreement and, in certain instances procedural steps that must be followed.
Factors to Consider When Terminating a Franchise Agreement
So, what factors should you consider and evaluate before terminating a franchise agreement? Well the answer will first depend on who you are - are you the franchisor or are you the franchisee?
- Factors to Consider for "Franchisors"
New York is a franchise registration state with certain franchise relationship laws. If you are a franchisor and you operate from or have a franchisee in New York you must first ensure that your FDD was properly registered with the New York attorney general prior to your execution and disclosure of the franchise agreement that you are now about to cancel. Assuming that you confirm that your regulatory framework was up to date then the next step is to review the alleged defaults by the franchisee (i.e., are the defaults curable such as is typically the case with non-payment of royalties or are they uncurable as is customarily the case with non-compete violations and significant operational deficiencies. If the defaults are curable you must ensure that your written demand notice specifies the deficiencies and (consistent with your franchise agreement) affords the franchisee a limited cure period. If the alleged defaults are uncurable then chances are that they are quite significant. A default notice must be submitted and consideration must be given as to whether or not a lawsuit is required.
- Factors to Consider for "Franchisees"
If you are a franchisee and you wish to terminate your franchise agreement, i.e., the term of your franchise agreement has not expired but you "want out", then careful planning is required. The biggest factor that must be decided (before you contact your franchise lawyer and the franchisor" is "what do you want"? Are you ok with exiting the business and leaving the industry or do you want to operate a competing "non-franchised" business. The latter scenario is much more difficult to attain as your franchise agreement will contain non-compete obligations. If you want to walk away you will still need to reach an agreement with the franchisor as you may be subject to continuing liability even after you leave the business.
- Basic Procedural Guidelines to Follow
Whether you are a New York franchisor or franchisee you must be detailed in your approach to a franchise termination. If you have established good cause for the termination of the franchise agreement (a consideration that you must discuss with your franchise lawyer) some basic procedural requirements, include:
- giving written notice of the termination within a required number of days in advance;
- including in the notice all the reasons for termination;
- including in the notice how much time, if any, the franchisee has to cure the default; and
- continuing to comply with the franchisor's obligations throughout the notification period.