Disenfranchised: How to Get Out of a Bad Franchising Agreement
Buying a franchise can be a lot like getting married: Your courtship is blissful, so you seal the deal and then enjoy a fruitful honeymoon period. But then, at some point, the relationship sours — and you decide you want out.
As in divorce, leaving is rarely easy if one party wants to void the agreement. “Franchise agreements are notoriously one-sided in favor of the franchiser company,” explains business litigator James Hunt of the law firm Slater, Tenaglia, Fritz & Hunt. “They are usually a corporate behemoth that has all the bargaining power and leverage and a large law firm to represent them.”
Nonetheless, dissatisfied franchisees may find relief if they did not get what they bargained for when they bought into the franchise. Here are three ways you might be able to invalidate a franchise agreement:
1. Look for disclosure defects. “Most franchisers are required by law to give the franchisee a [financial] disclosure statement,” Hunt says. “If the franchiser failed to supply one, provided erroneous information, or violated disclosure laws in any way, a franchisee might be able to terminate the agreement.”
2. Provide evidence of fraud. You might successfully nullify the agreement “if you can prove fraudulent or false statements were made by the franchiser company that induced the franchisee to sign the agreement,” Hunt explains, adding that that can be challenging to prove. “This is called rescission, and allows the franchiser to rescind or void the agreement.”
3. Return the business. This may be a last resort, because it often comes with a heavy price and “Draconian conditions,” Hunt says. Franchisees may still have to pay franchisers all monies owed, release franchisers from paying debts, agree not to sue the franchiser, and stipulate to a non-compete and non-solicitation of customers agreement (for a given period of time within a specified radius of the business).
Although perhaps easier said than done, perhaps the best defense against buying into a franchise is a good offense: Know what you’re getting into in the first place.
Dave Clarke is a business writer for Intuit and is passionate about solving small business problems.