Franchising can be a quick, easy way to establish yourself in business. As a franchisee, you get instant brand recognition. For a franchisor, you receive payment on the use of your business name and, potentially, royalties on your franchisee’s profits.
Sometimes, the franchise agreement simply is not a match, and the owner and operator each want to take their business elsewhere. Other times, catastrophe strikes, and one party wants or needs to terminate the agreement immediately.
Under Florida law and most franchise agreements, the parties may be able to end the contract early in certain limited circumstances and with few financial or legal penalties.
In this post, the BrewerLong team will explain the basics of how to get out of a franchise agreement in Florida. We will walk you through some of the legal essentials of how to terminate a Florida franchise agreement and provide some practical tips for both franchisors and franchisees.
What Is a Florida Franchise Agreement?
A franchise agreement is a contract between a franchisor and its franchisee. It typically contains information about how the franchise must be operated. It will also include information regarding the relationship between the parties during the franchise relationship.
These agreements often contain language governing what each party can and cannot do after the termination of the agreement, including any restrictions on competition, solicitation of employees, and operation of other businesses.
Generally, franchise agreements address:
- Initial and ongoing franchise fees,
- How long the agreement lasts,
- How the parties can renew the agreement,
- What training will the franchisor provide,
- What intellectual property or branding the franchisee may use,
- How the franchisee can use that intellectual property,
- Advertising rules and expectations,
- Details about the franchise location,
- How the agreement can end,
- When and how the franchisee or franchisor can transfer or sell their interest in the franchise location,
- Insurance requirements and indemnification rules, and
- How the franchisor and franchisee will resolve disputes.
Franchise agreements can be complex, and it helps to speak with an experienced business law attorney before signing one. They can be far-reaching and contain provisions for much more than just broiling burgers or slinging slushies.
Most prevent termination except for “good cause,” which is defined by state law. Without a material breach of the contract, a material misrepresentation, or other termination for good cause, most franchise agreements terminate at the contract’s expiration.
When Can a Florida Franchise Agreement Be Terminated?
Under Florida franchise law, a party can terminate a Florida franchise agreement under a few conditions. The main condition is a material breach of the contract.
What Makes a Breach Material
You breach a contract when you do something contrary to it or fail to do something it requires of you. However, to justify ending the contract, the breach must be material.
A breach is material when it affects the heart of the contract. It cannot be just a technical violation, like a delivery that arrives at 5:02 AM when the contract specifies 5:00 AM. In other words, the breach must impact whether the parties can fulfill the contract as originally intended.
Material Breaches by Franchisees
For example, reasons a franchisor could terminate a franchise agreement for a franchisee’s material breach of contract include:
- The franchisee is convicted of a crime;
- They lose a necessary license, business lease, or location;
- The franchisee fails to pay royalties;
- The franchisee fails to correct some contract default after notice from the franchisor;
- They go bankrupt or become insolvent;
- They fail to follow franchisor requirements regarding location and business or product appearance; and
- The franchisee fails to comply with required business operations.
In several of these circumstances, the franchisee’s conduct means they can no longer properly fulfill the contract. In others, they have violated the agreement, making maintaining the ongoing relationship between the franchisee and franchisor incompatible.
Material Breaches by Franchisors
Likewise, a franchisee could terminate the agreement for material breach of contract if a franchisor:
- Fails to provide a material item or type of training that is stipulated in the contract;
- Commits fraud or misrepresents the franchise’s potential profits;
- Does not protect the franchisee’s business opportunity or market territory; and
- Goes bankrupt or becomes insolvent.
In those examples, the franchisor’s conduct has made it difficult or even impossible for the franchisee to be a franchise location.
Material Breach Example
These are only some examples of what a material breach could look like by either a franchisee or a franchisor. For instance, if you are a franchisee of an ice cream franchise and the franchisor fails to train your location on how to operate the very specialized machines that you are required to purchase and exclusively use, that might be considered a material breach of contract.
However, if you are a franchisee of the same ice cream company and the franchisor takes several months to send a representative to train your staff on making fancy ice cream cakes, that may not qualify as a material breach.
The first breach is material because it affects the franchisee’s ability to perform the franchise work—selling ice cream. The second breach may not be material if ice cream cakes are a bonus item not every franchise location sells. If, however, ice cream cakes are one of the items the franchise is best known for, the breach may be material.
Speak with an experienced small business lawyer to understand Florida franchise law and the ramifications of a material breach of a franchise agreement for your small business. The BrewerLong team is here to help.
What Is a Termination Clause?
A termination clause describes whether, when, and how a party can terminate a franchise agreement. Each franchise agreement is different. However, most include a termination clause that allows a party to end the agreement under specific circumstances. When planning for a franchise exit, a termination clause can guide you.
Contracts frequently authorize termination when:
- The parties mutually agree to terminate,
- A party falls short of its obligations in a significant way, or
- Good cause exists.
What qualifies as a good cause may vary significantly between different types of businesses. Generally, however, good cause means termination is justified in the circumstances. For example, you may have good cause to terminate a franchise agreement if a new CEO takes over the franchisor and fundamentally changes what the business does.
Most termination clauses also include a notice provision. When a party exercises its termination rights, it typically has to notify the other party a set time in advance. Agreements often require at least one month’s notice and may require more time.
A franchisee who makes $100,000 in profit in Year 1 might be disappointed by the result but might not have sufficient grounds to terminate the agreement. But the franchisee might be able to terminate the agreement if the franchisor stated or even implied that they would make $1 million each year in profit.
Frequently Asked Questions
What Do Franchise Agreements Address?
Franchise agreements typically cover:
- Fees and payment schedule,
- Agreement length and renewal options,
- Training and equipment,
- Use of the franchisor’s intellectual property and branding,
- Requirements of franchise locations,
- Termination and transfer terms,
- Insurance and indemnification requirements,
- Dispute resolution processes, and
- Requirements after the agreement ends.
Individual franchise agreements may also include additional terms related to their specific work.
When Can You Terminate a Franchise Agreement in Florida?
You can terminate a franchise agreement when:
- An event occurs that enables a party to terminate based on a termination clause,
- A party materially breaches the contract, or
- The contract period ends.
If you terminate an agreement in another circumstance, you may owe damages to the other party.
What Is a Material Breach of a Franchise Contract?
A breach of a franchise contract occurs when a party acts contrary to the agreement or fails to act according to the agreement. That breach is material when, if the parties were to move forward, they would not or could not honor the original contract.
How BrewerLong Can Help
At BrewerLong, we understand the unique challenges entrepreneurs face, especially in the franchise context. We dedicate our time and resources to serving those starting, running, and growing businesses throughout Florida—whether you do it by starting a company from scratch or buying a franchise. If you are interested in buying, setting up, or terminating a franchise in Florida, call our team today or contact us online.
Since its inception in 2008, our firm has put people and relationships first, successfully serving business owners and their families.
This blog post is provided on an “as is” and “as available” basis as of the date of publication. We disclaim any duty to update or correct any information contained in this blog post, including errors, even if we are notified about them. To the fullest extent permitted by law, we disclaim all representations or warranties of any kind, express or implied with respect to the information contained in this blog post, including, but not limited to, warranties of merchantability, fitness for a particular purpose, title, non-infringement, accuracy, completeness, and timeliness. We will not be liable for damages of any kind arising from or in connection with your use of or reliance on this blog post, including, but not limited to, direct, indirect, incidental, consequential, and punitive damages. You agree to use this blog post at your own risk. Regarding your particular circumstances, we recommend that you consult your own legal counsel–hopefully BrewerLong.
Rate this Post
Loading...