Exiting a Franchise Agreement

Picture of Schuyler "Rocky" Reidel

Schuyler "Rocky" Reidel

Schuyler is the founder and managing attorney for Reidel Law Firm.

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In most circumstances, a successful franchise relationship provides both parties with significant benefits. The franchisor grows their brand while the franchisee receives a positive return on their investment. In some circumstances, however, a franchise relationship does not work out. Such failure may arise through no fault of the parties, for example if the franchisee wishes to retire. It may also arise through failures in the franchise relationship, for example a real or perceived lack of support by the franchisor, operational problems, or poor communication. Previously, we discussed the warning signs of a struggling franchise relationship, steps to take in repairing that relationship, and what franchisees and franchisors can do to avoid termination.

Sometimes, despite your best efforts, the only reasonable option available to a franchisee is to end the relationship altogether. In this article, we will review three common methods of exiting a franchise agreement, including selling the franchise, negotiating a mutual termination of the agreement, and finally, abandonment.

  1. Sell the Franchise

The best option, if it is available under the terms of your agreement and the facts of your case, is to sell the franchise. This allows you to exit the franchise agreement and hopefully recoup some of your investment in the process.

There are some downsides to selling your franchise, including the length of time it can take to find a qualified and appropriate buyer. Depending on the circumstances, your landlord or other third parties may also need to sign off on the sale, and you may be required to refurbish and clean the premises. You will also be liable to pay any transfer fees stipulated in your franchise agreement, generally either a fixed amount or percentage of the sale price. You will also be obligated to pay any outstanding monies owing under the agreement and may be required to deposit a performance bond with the franchisor to cover any liabilities that may be revealed or discovered after the transfer.

In many cases, your franchise agreement will include a clause that gives the franchisor a right of first refusal. Where applicable, this right of first refusal is triggered upon your receiving a genuine offer from a prospective purchaser. Depending on the terms of your franchise agreement, this offer must be submitted to the franchisor, who will have a certain period of time to decide whether to purchase the franchise. If the franchisor does not elect to exercise its rights within that period, then you are free to sell the business to a third party.

At Reidel Law Firm, we protect the interests of clients wishing to sell their franchise business, providing strategic advice at every step of the process. If you are thinking about selling your franchise, our experienced team will help to clean up your financials and business contracts, set the right value for the business, and prepare your exit strategy to ensure a seamless transition.

However, in some cases, the option to sell will not be available to you. For example, there may be no appropriate buyers in your market. In these situations, you will need to consider alternative options.

  1. Negotiate a Mutual Termination:

Where selling the franchise is not a viable option, a second potential course of action is to negotiate a mutual termination of the relationship with the franchisor. A negotiated termination can help to protect the value of the franchise business while maintaining the goodwill generated through years of operation, until a new permanent owner can be found.

Negotiated terminations may include a varied array of terms. They may provide for the takeover of the business by the franchisor, an agreed payment of damages to the franchisor, non-competition clauses, or even an agreement on the timeline and process for winding down the business. In some cases, negotiated arrangements will involve a franchisor assisting with the management of the business in exchange for a fee, until a purchaser can be found. The franchise team at Reidel Law Firm has the experience necessary to consider the entirety of your unique circumstances and negotiate an agreement that protects your interests.

The process of negotiated termination is often more expensive than simply selling the franchise. It can also take a significant amount of time to conclude negotiations and prepare a draft agreement. This process can often be fraught with emotion for the parties involved, and in some cases may give rise to previously unanticipated disputes between them. The support of an experienced franchise attorney can help you navigate this potentially complicated process and ensure the negotiated terms appropriately reflect your needs.

  1. Abandonment of the Franchise:

A franchisee that abandons their franchise walks away from their investment and ends all of the operations of the franchise unit, giving up everything that you have invested and the work you put into building the business. Abandonment of the franchise is, of course, not an ideal choice. But in the most extreme of circumstances, it may be the only means by which you can exit a franchise relationship that is no longer viable.

This option is also most likely to cause legal conflict with the franchisor, and abandonment can lead to proceedings being brought against you for compensation. Due to the risks of litigation, and the fact that you may be liable for significant damages to both the franchisor and other third parties whose interests have been harmed by your ceasing operations, abandonment is not recommended outside of the most extreme of circumstances. The skilled franchise team at Reidel Law Firm can review your franchise agreement and provide advice on the implications of abandonment, so you can make an informed decision.

Call Reidel Law Firm for Advice on Ending a Franchise Relationship

Exiting a franchise agreement before the end of its term is not an ideal course of action; it is generally difficult and, in some scenarios, can be very expensive, with damages being owed to the franchisor and other parties. The process must be carefully handled to ensure compliance with all of the termination requirements set out in your franchise agreement. As such, hiring a skilled franchise attorney to provide advice and guidance is critical.

If you have concerns about your franchise relationship and are considering your options to terminate, contact the franchise team at Reidel Law Firm for strategic advice before you take action. Reach out using the email button below, or by calling 1-832-510-3292.

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