Written By: Gouri Ghosh  

When people plan to buy a franchise, they think about everything. They research different franchises for months, comparing the cost of the franchise, looking at the revenue, and talking to the salespeople. They think that as a business owner, they will get more freedom, a steady income, and growth potential. It’s a excited time. You’re thinking about how you can build the business, not how it’s going to fail.

But almost nobody asks a simple question: What happens if this doesn’t go as planned?

Your income will slow down or may stop. You are still responsible for the lease. You are still responsible for some payments. And you might not be allowed to operate a similar business to earn back your losses.

This is why you need to understand the termination clause in the franchise agreement. In this guide, we will explain everything you need to know to protect yourself in this situation.

What Is a Franchise Termination Clause? 

A franchise termination clause is the section of your franchise agreement that indicates how the relationship between you and the franchisor can be closed. 

In other words, it is the section that shows when the contract can be terminated and who has the power to do it.

There are three different types of franchise termination clauses:

1. Termination by the Franchisor

The brand terminates your franchise agreement, typically due to a breach of contract or other trigger.

2. Termination by the Franchisee

You choose to end your franchise agreement. This is typically more difficult and expensive than you thought.

3. Mutual Termination

Both parties agree to terminate the franchise agreement.

The key thing to remember: this clause controls your exit and your financial risk.  

Table for  Termination Triggers 

Why Most Franchise Buyers Ignore It?

When you buy a franchise, you’re thinking about making money, expanding the business, and creating something of your own. You think about reputation, support, and how much money you can make. Nobody cares more about reading the exit terms.

Why does this happen?

1. Excitement misguides you:

 You’re thinking about success. You know things will work out. Reading about termination is negative, so you ignore it.

2. Sales talks are reassuring

 The franchise salespeople talk about training, marketing, and support. These parts of the contract aren’t discussed carefully.

3. “It’s a standard contract” is reassuring

 Most people think that if it’s standard, mean it’s okay. But most contracts are written to favor the franchisor.

4. Save legal expenses

 Some people don’t hire a franchise lawyer to look over the contract. It seems like an unnecessary expense until a problem arises.

5. Large brand names make you feel safe

 A reputed brand name, such as McDonald’s or Subway, may make you feel safe. However, even large brands have contracts that look out for their own interests.

Most people don’t ignore the termination clauses. They simply don’t understand the significance of the clauses.

Types of Termination

Not all terminations are the same. Some are quick. Others give you a chance to correct the issue. This is very significant.

A. Immediate Termination (High-Risk )

In these cases, your franchisor may be able to immediately terminate your contract. No notice. No second chance.

Examples of triggers include:

• Filing for bankruptcy
• Being convicted of a crime
• Abandoning your business
• Selling or transferring your franchise without permission
• Failing to comply with operational requirements on multiple occasions

B. Termination After Notice & Cure Period

In other cases, you may get a written notice first. Along with the notice, you are given a notice and cure period.

The notice and cure period simply means you are given time to correct the problem.

Examples of this include:

• Making late royalty payments
• Failing to meet quality control requirements
• Failing to meet brand standards

The problem with this is:

• A 10-day notice and cure period can be very stressful and rushed.
• A 30-day notice and cure period gives you more time to properly address the problem.

Cure Periods Comparison Table

The Hidden Exit Risks in Franchise Termination

When buying a franchise, people are excited about opening their business and making profits. However, franchise termination can be costly and complex. There are clauses in many franchise contracts that may pose significant financial and legal risks in case the contract is terminated.

Below are the most common hidden exit risks that every franchise buyer must be aware of before signing the contract:

1. Cross-Default Clauses

When you want to exit due to being in default of your store lease or a business loan, the franchisor may have the right to terminate your franchise agreement.

This indicates that one financial issue can lead to a complete shutdown.

2. Personal Guarantees

Most franchise contracts require you to personally guarantee the obligations of the business.

When the franchise is terminated, you may still be personally liable for unpaid royalties, damages, or legal fees, even if you have an LLC.

3. Post-Termination Non-Compete

After the termination of the franchise, you are not allowed to start a similar business for 1-2 years in a specific area.

This can affect your ability to earn money in the same sector and delay your recovery process.

4. Liquidated Damages

If you terminate the franchise agreement prematurely, you have to pay a significant amount of future royalties for the remaining period of the contract.

Even if you are not operating the business anymore, you might have to pay a substantial amount of money.

5. De-Branding Costs

Termination of the franchise always involves the removal of all signs, logos, branded products, and marketing materials.

These costs are always your liability.

6. Equipment Buyback at Reduced Value

In some contracts, the franchisor has the option to purchase your equipment at a reduced value.

You pay the equipment’s full price when you begin, but you might get only a fraction of it back in case of termination.

Financial Effect of Franchise Termination 

Termination of the franchise is not merely about shutting down the outlet. It can also result in immense financial pressure.

Now break it down with a simple example:  

• Your Initial investment: ₹2 crores
• 7 years remaining in the agreement
• 6% royalty structure
• Estimated liquidated damages: ₹1 crore or more
• 3 years remaining in the lease

Now, suppose the business is shut down. The financial liability does not necessarily stop there.

You may still be liable for:

• Liquidated damages
• Remaining lease rent
• Legal costs
• De-branding and removal costs

That's why it is important to understand legal requirements in franchise termination. It is financial security. Before you invest your hard-earned money, you must know what  will be the exit cost .

Understand The Red Flags Before Signing

Before signing a franchise agreement, it is essential to slow down and carefully read the termination clause. A small point in the termination clause can lead to big problems.

Some red flags are:

“At franchisor’s sole discretion.”

This indicates that the brand has broad discretion to make decisions with little opportunity for you to contest them.

Broad definitions of “material breach.”

When “breach” is defined too broadly, almost any error can become a basis for termination.

Meaningless cure period

A short or ambiguous cure period provides little opportunity for you to correct a problem before it is acted upon.

Termination rights that favor one party

The franchisor may easily terminate the agreement, but your termination rights are very limited.

Onerous non-compete provisions

A long time period or a broad geographic area can make it difficult to revive your career in the same industry.

Automatic denial of renewal

Renewal is not automatic. Some agreements allow the franchisor to deny renewal without a good reason.

In addition, it is important to take the time to review several Franchise Disclosure Documents (FDDs).  

Can You Negotiate Termination Provisions?

Sometimes buyers think that franchise agreements are fixed and cannot be changed. This does not always happen, but it depends on various things.

Your negotiation position will depend on:  

• Size of the brand: Larger brands tend to offer less flexibility
• Market demand: Franchises with high demand have less reason to negotiate
• Corporate structure: Multi-unit purchases tend to carry more weight than single units

Franchises like The UPS Store rely on standardized agreements that are not open to negotiation.

What Occurs After Termination?

Termination rarely occurs slowly and with flexibility. Most times, termination occurs rapidly and according to a set of rules that are outlined in your contract.

Here’s what normally occurs:  

• Stop operations: You shut down the business immediately. No grace period in most instances.
• Remove branding: All signs, logos, uniforms, packaging, and other branded items should be removed.
• Return materials: Training manuals, software, and confidential information should be returned.
• Clear pending payments: All remaining financial obligations should be cleared.
• Adhere to non-compete agreements: You may not be allowed to compete with your former employer by starting a competing business for a specified period of time and location.

Lessons from Franchise Disputes

Some common problems are:

• Sales are gradually slowing down: When sales gradually slow down, the pressure increases, and the franchisor may intervene.
• Territorial disputes: A new store opens in the vicinity, or the territorial rights were not well understood.
• Tight inspections: Minor mistakes during inspections escalate into major warnings.
• Missing reports: Incomplete or late reports cause issues in the contract.

The key takeaway is:

Most franchise terminations are not fraud.

They are usually due to:  

• Misunderstanding the contract
• Poor performance over time
• Minor infractions of the rules

Good preparation is key. Understanding the contract today can save serious trouble tomorrow.

Read more: Franchise Agreement Clauses That Decide Your Profit

Franchise Failures in India: Why Investors Lose Money & How to Avoid It

Conclusion

Purchasing a franchise is an exhilarating experience. You look at the profits, the expansion, and the creation of something of your own. However, every franchise contract also outlines how the contract can be terminated. And this aspect should be given equal importance.

The termination clauses determine when the franchisor can terminate the contract, what are the errors that can lead to termination, and what financial obligations can be continued even after the business is closed down. 

Frequently Asked Questions (FAQs)

1. What is a franchise termination clause?

It is a part of the franchise agreement that defines the terms and conditions of the termination of the agreement and what happens after that.

2. Can a franchisor terminate the agreement immediately?

Yes, in cases of serious breach, bankruptcy, or abandonment of the business. In some cases, the agreement can be terminated immediately without notice.

3. Can I exit my franchise whenever I want?

No, not in most cases. There are strict terms and conditions in most agreements. Early termination may also result in financial penalties and approval from the franchisor.

4. What are liquidated damages?

Liquidated damages amounts are predetermined and written in the agreement. In case of early termination of the agreement, you may be asked to pay an estimated amount of future royalties for the remaining period.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.