Editorial

Franchisees (or Their Attorneys) Should Request that Franchise Agreements Contain "Early Out" Provisions

Most form Franchise agreements do not contain “early out” provisions for franchisees. We have found that this right is increasingly of interest to our franchisee clients as they face dramatic changes in their franchisor/franchisee relationships, with no way to get out of relationships, which, although starting well, have soured.

In those situations, our clients are surprised to learn that, even though their franchise may be losing money, the franchisor will look to them to honor the commitment in the franchise agreement to pay royalties for the duration of the relationship. In other words, if they signed a 20-year franchise agreement and, after year one, determined that they could not afford to stay in business, and they, therefore, shut down their franchise, they may be on the hook to their franchisor for 19 years worth of future royalties, less the franchisor’s cost of generating these royalties, unless they negotiate, up front, the right to get out early.

While we have seen “early out” rights come in different forms, the most advantageous for a franchisee is one that gives the franchisee the right to end its relationship with the franchisor for any reason upon giving notice to the franchisor. Another example would be for the franchisee to have the right to end its relationship with the franchisor if the franchisee does not reach a particular sales metric (e.g., gross sales in excess of $500,000 within the first six months).

Finally, it is a very good idea for a prospective franchisee to hire an attorney to review the UFOC and franchise agreement prior to signing the franchise agreement. An experienced franchise attorney knows what to look for in a UFOC and can help the prospective franchisee avoid potential pitfalls contained in the franchise agreement. Perhaps most importantly, an attorney can help negotiate more favorable terms and, potentially, save a franchisee tens of thousands of dollars should the franchise relationship sour.

¹I wish to thank C. J. Kuhn, as associate attorney at Dady & Garner, P.A., for his assistance in preparing this article.