Franchising is a contractual relationship between independent business owners. It is a business arrangement where one party (the franchisor) grants another party (the franchisee) permission and right to operate a business using its established brand, systems, and processes. The franchise relationship will eventually come to an end and is a natural part of the business lifecycle.   

Terms to understand 

Types of exits  

• Early exit is when a franchisee may wish to exit a franchise early for a range of reasons, such as profitability, illness, or sale.
• Expiry is when a franchise comes to the end of its specified term. 
• Termination is when a franchise is ended before its specified term and can be due to the actions of the franchisee and/or the franchisor. For example, following the issue of a breach notice and after all dispute resolution processes have been completed. 

Business sale 

• A franchisor may sell a franchise to another person, and such transactions are usually outlined in the franchise agreement. It is important for franchisees to carefully review these clauses, as these agreements often allow these sales while keeping the franchisee contractually bound. Given the importance of the relationship between the franchisee and franchisor, this is an important consideration when entering into franchise agreements, especially where the culture of the franchise is important to the success of the operation.
• Franchisees may want to sell their franchise business. Franchise agreements often allow for such sales with first option for purchase being to the franchisor, and then sale to third parties requiring the franchisor’s approval. Since the franchisor can stop the sale of the franchise business, it is important to get legal advice on the relevant franchise agreement clauses as it can mean that if a franchisee needs to exit the business, it is possible they receive no value for the franchise. 

Goodwill 

• Goodwill refers to the market value added to the franchise business by the franchisee; for example, by building a client-base. However, in franchising, franchisees often have limited rights when the franchise agreement ends. You may not get any value for goodwill at the end, or it might be highly contested whose efforts built the goodwill value.  

Insolvency 

• Insolvency of a franchisor or franchisee may result in a franchise ending. Franchise agreements can specify that a franchise may end if the franchisee become insolvent. 

Restraint of trade 

• Restraint of trade clauses are used in franchises to protect the franchisor’s intellectual property. When entering into a franchise arrangement, it is important to carefully review and seek expert advice on these clauses, as they can significantly affect what the franchisee is permitted to do after the agreement ends.