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Can I Exit a Franchise Agreement?

Sometimes buying a franchise does not work out and when that happens, we can assist with exiting so you can move on with your life.  Although franchise agreements are typically one-sided in favor of the franchisor, and don’t leave a lot of room for negotiation or termination, that does not mean you are stuck.

There are different avenues we can explore to help you leave your franchise without causing too much of a financial burden. If you want to exit the business, you have a few options: (1) see if you have any legal claims you can leverage against the franchisor; (2) transfer ownership or sale to another franchisee; (3) sell the location back to the franchisor; or (4) negotiate an exit from the franchisor for minimal cost.  We can help determine which options make most sense for you.  

Leveraging Claims Against the Franchisor 

The franchisor – the owner of the entire franchise business – may not have disclosed critical facts about the business or may have intentionally misrepresented the business.  This can include various situations, such as not informing you about pending litigation, misrepresenting earnings you can expect to make, understating the cost to open the business, or not fulfilling promises made within your agreement. This may provide grounds to terminate or rescind the agreement.  If you have fraud or breach of contract claims, we can leverage those to obtain an exit and often a return of some, if not all, of your investment.

Selling or Transferring the Franchise

Your best choice may be to find a buyer to whom you can sell or transfer the business. You can transfer your business to another franchisee or find a new entrepreneur who is eager to acquire your existing franchise territory or business.

Selling a franchise requires the consent of the franchisor. It is possible that certain conditions must be met before the franchise agreement can be signed, including payment of a transfer fee.

Withholding consent must be justified in most circumstances, either under the franchise agreement or franchise relationship laws. The franchisor typically cannot withhold consent unreasonably. Franchisors can provide reasons that may or may not be applicable depending on the agreement and applicable statutes including: (1) the buyer does not meet the franchisor’s selection criteria, (2) sellers and current franchisees have breached the agreement and have failed to remedy it; or (3) franchisees or sellers owe money to franchisors.  If the franchisor is denying consent, we can analyze whether the franchisor is breaching the franchise agreement or violating a state law.

Even though selling the business is the ideal scenario, it may not always be possible – a buyer may not be found in time or the business may not be profitable enough to entice a buyer. But selling for less than the investment amount may have its benefits in terms of recouping part of the investment and avoiding long term liabilities with the franchisor and landlord.

Negotiating Liquidated Damages (the “Exit Fee”)

The consequences of being terminated by a franchisor or abandoning the franchise should be understood by franchisees. Many franchise agreements require franchisees to pay franchisors for “future lost profits” (also known as liquidated damages). Franchisees may also be liable for fees, royalties, and the loss of their franchise rights. They may even be required to pay these future royalties for the remainder of the term. 

A similar situation occurs when a tenant’s lease terminates, but they still owe rent for the remaining years. The franchisor may also enforce the non-compete provisions of the franchise agreement to prevent the terminated franchisee from opening a similar business after termination.

Franchise agreements include liquidated damages clauses to address possible damages caused by a breach of contract. In this clause, both parties agree that a predetermined amount of damages will be payable if a breach occurs.  We can evaluate whether a liquidated damages clause is enforceable and in most situations negotiate the amount down.

Waiting Out the Agreement 

If these other options are not a possibility, you may simply have to wait out your contract. While that sounds like an unfortunate solution, you have some choices to make the situation better:

      Request Additional Training 

Operating a franchise isn’t easy, and you may not have all the skills or tools necessary to succeed. Your franchisor may be open to the idea of helping you receive the training you need to run your business more effectively.

      Request Additional Marketing Support

If finding customers is an issue, franchisees can work with franchisors to obtain additional marketing support.  For example, a franchisor may be willing to contribute to a marketing initiative to try to keep the franchise afloat.

      Change Your Territory

Many franchises might not perform well if they’re located in the wrong area. If you believe this might be a contributing factor to your franchise’s performance, you can discuss it with your franchisor and see if they are willing to renegotiate your territory and help drive more traffic to your business.

Regardless of whether you can terminate your contract or agree to wait it out, you should consider consulting with a franchise attorney. Franchising contracts can be complicated to navigate and understand, and an experienced franchise attorney can help find a solution that works best for you.

Set Yourself Up for an Exit 

Leaving a franchise system can be difficult and franchisors often threaten substantial damages.  To learn more about your options, and to choose the best course of action, call or email us today to schedule a consultation.