Exiting a Franchise

Can I Exit a Franchise Agreement?

Yes, it is possible to exit a franchise agreement, although the process depends on your franchise agreement, state law, and the circumstances surrounding your business. Options may include negotiating an exit, selling or transferring the franchise, asserting legal claims, or negotiating reduced financial obligations. 

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.  

Reviewing your Franchise Disclosure Agreement (FDD) alongside your franchise agreement may identify disclosure issues or inconsistencies that affect your legal options. 

Using Legal Claims to Exit a Franchise Agreement 

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 Your 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. A franchisor often requires approval from the franchisor and compliance with the transfer provisions in your franchise agreement. 

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 When Exiting the Franchise 

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. Many franchise disputes arise after franchise termination, making it important to understand your post-termination obligations before agreement to an exist. 

Non-compete clauses vary by agreement and state law, so they should be carefully reviewed before accepting any exit proposal. 

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.

When Waiting Out the Franchise Agreement is the Best Option 

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.

Talk to a Franchise Attorney Before Exiting Your Franchise 

Every franchise exit strategy should balance financial obligations, contractual rights, and long-term business goals. 

Whether you’re considering selling your franchise, negotiating an exit, or responding to a franchise dispute, our franchise attorneys can evaluate your agreement and explain the options available to help protect your investment. Contact Luther Lanard to schedule a consultation.

Frequently Asked Questions 

Can a franchisor refuse to let me sell my franchise?
Only for valid reasons like an unqualified buyer or unpaid debts. A franchisor usually cannot withhold consent unreasonably under your agreement or state law.

What are liquidated damages in a franchise exit?
This is a preset dollar amount you may owe for lost future profits if you leave early. An attorney can review whether the clause is enforceable and negotiate it down.

Does a non-compete clause still apply after I leave a franchise?
Often yes. Many agreements bar you from running a similar business nearby for a set time after exit. Terms vary by contract and state law.

Can franchise disclosure problems help me exit my agreement?
Yes. If the franchisor hid facts or misrepresented earnings, costs, or risks, this may support a fraud or breach of contract claim to exit and recover funds.