I’ve had to do this a few times. It is unfortunate, but it happens. Here are a few points and steps I recommend thinking about:
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do you have a contract? If so what does the contract say about termination if anything?
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have an honest conversation with the owner of the outside firm. Let them know exactly what you told us, just as plainly and even more bluntly. Be specific. Give him or her the option of either a) you have 1 week to completely redo everything, follow the brief, and impress me, if not you will be terminated in 1 week, or b) you can opt out now and mutually part ways.
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be fair. Pay them out for the hours spent if that is how the contract or agreement is worded. Ask them for feedback, could you have been more clear/direct in your feedback?