3 Strategies For Leaving Your Franchise Business

In Short

• Most franchise agreements do not allow franchisees to exit easily, but options include using the cooling-off period, selling the business or negotiating an exit.
• If the franchisor breaches the agreement, you may have legal grounds to terminate, but you will need strong evidence.
• Abandoning a franchise can lead to serious financial and legal consequences.

Tips for Businesses
Before deciding to exit your franchise, review your agreement, seek legal advice and explore all options. If selling, get franchisor approval early. If negotiating an exit, present a clear proposal. Avoid abandoning the business, as it could leave you liable for unpaid fees, lease obligations and potential legal action.

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Table of Contents

• Option 1: Leave the Business Within the Cooling Off Period
• Option 2: Exiting Due to the Franchisor’s Breach
• Option 3: Abandonment of the Franchise
• Key Takeaways 
• Frequently Asked Questions

What happens if you are a franchisee and you decide you are leaving your franchise business? While they vary, most franchise agreements do not allow a franchisee an easy way out of their agreement. There is no clause entitling a franchisee to terminate ‘at will’ in most cases.  However, there are some options available. This article will discuss these options and explain what you need to weigh up when deciding how to exit your franchise business.

Option 1: Leave the Business Within the Cooling Off Period

If a franchisee decides to leave the business early, the Code entitles the franchisee to simply end the agreement in the first fourteen days after paying any non-refundable monies or entering into the agreement without any consequences. This is called a ‘cooling off period’. After this period, franchisees will likely breach the agreement if they attempt to break the contract and may be forced to pay compensation. 

What Steps Should I Take to Leave My Franchise Early?

The steps that should be followed when you plan to leave a franchise are:

1. Seek Legal Advice: It is important to understand how the termination provisions of the franchise agreement operate before any steps are taken. If you have a complaint against the franchisor that gives rise to a legal claim, you may be able to get out of the franchise and get some or all of your money back.
2. Send a Written Proposal for Termination: You should send the franchisor a proposal to terminate the franchise agreement. You should specify the terms of the proposal and the date you would like to terminate the franchise agreement. Under the Code, the franchisor must provide you with a written response within 28 days. Note that the franchisor is not obliged to accept your proposed terms, so you should give them some incentive to accept as part of your proposal. However, if the franchisor does reject the proposal, they must provide their reasons for refusing it.
3. Request a Breakdown of Costs: This only applies if you need to pay compensation for breaking the agreement, such as because the franchise agreement entitles the franchisor to charge an ‘exit fee’. In this case, you should request a breakdown of the cost (a ‘payout figure’) from the franchisor.

Where the franchisor asks for a lump sum payout figure, you should consider negotiating paying in instalments if you are in a difficult financial position. If this kind of agreement is reached, it should be documented in a settlement agreement.

If leaving the franchise business before the end of the lease, this must be communicated to the landlord, as they will need time to find a new tenant for the premises. As with the franchise agreement, however, very few leases entitle the lessee to terminate the lease ‘at will’, and there is no right to terminate. If you simply ‘shut up shop’, you could be deemed liable for the balance of the rent and other monies payable under the lease for the balance of the term. 

Option 2: Exiting Due to the Franchisor’s Breach

Franchisors might breach the agreement in various ways. Common breaches include:

• failing to provide promised support or training;
• misrepresenting financial projections or earnings potential; and 
• violating territorial exclusivity agreements. 

Other serious breaches could involve:

• failing to maintain required licenses or intellectual property rights; 
• making significant changes to the franchise system without proper consultation; or 
• breaching confidentiality or misusing franchisee data. 

Steps to Take if You Suspect a Breach

1. Document Everything: Keep detailed records of all instances where you believe the franchisor has failed to meet their obligations.
2. Review Your Agreement: Carefully examine the franchise agreement to confirm the franchisor’s obligations and any clauses related to breach and termination.
3. Seek Legal Advice: Consult with a franchise lawyer to assess whether the franchisor’s actions constitute a material breach and justify termination.
4. Formal Notification: If advised by your lawyer, provide formal written notice to the franchisor detailing the alleged breaches and giving them an opportunity to remedy the situation, if required by your agreement.
5. Dispute Resolution: Follow any dispute resolution procedures outlined in your franchise agreement, which may include mediation or arbitration.

Potential Outcomes

1. Negotiated Exit: The franchisor may agree to an early termination to avoid legal action.
2. Damages: You may be entitled to compensation for losses resulting from the franchisor’s breach.
3. Termination: If the breach is material and not remedied, you may have grounds to terminate the agreement without penalty.
4. Legal Action: In some cases, you might need to pursue legal action to enforce your rights or seek compensation.

Cautions

Exiting a franchise agreement in this way comes with several important considerations. The burden of proof will be on you as the franchisee to demonstrate that a material breach has occurred. This often requires extensive documentation and may necessitate legal action. 

Exiting a franchise agreement due to a franchisor breach can be complex and contentious. While this option can provide a way out of a problematic franchise relationship, it should be pursued only when there is clear evidence of significant breaches by the franchisor.

Negotiating Franchise Agreements Factsheet

When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.

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Option 3: Abandonment of the Franchise

While it may seem tempting to simply walk away from your franchise business, abandonment carries significant risks and potential consequences for franchisees. Before considering this option, it is crucial to understand the following aspects. 

Legal Implications of Abandonment

• Automatic Termination: Many franchise agreements include clauses that treat abandonment as grounds for automatic termination. This can trigger severe penalties and legal consequences.
• Contract Repudiation: Abandoning your franchise is likely to be viewed as a repudiation of the contract. This can lead to:
  • the franchisor claiming damages for breach of contract; or
  • liability for ongoing royalties and fees for the remainder of the agreement term. 
• Legal Disputes: Abandonment often leads to disputes between franchisees and franchisors. These disputes may centre around:
  • the reason for abandonment;
  • the extent of the franchisee’s continuing obligations;
  • the franchisor’s right to damages; or
  • the validity of non-compete clauses post-abandonment

Financial Consequences

• Franchisor Claims: You may face substantial financial claims from the franchisor, including:
  • damages for breach of contract;
  • ongoing royalties and fees; and
  • costs associated with finding a new franchisee
• Third-Party Liabilities: Abandonment does not just affect your relationship with the franchisor. You may face mounting liabilities to:
  • suppliers who are owed money;
  • landlords for ongoing lease payments if you’ve signed a commercial lease;
  • employees for unpaid wages or entitlements; and
  • customers who have paid for goods or services not yet delivered
• Potential for Legal Costs: If disputes arise, you may incur significant legal fees defending your position or negotiating settlements.

Seeking Professional Advice

Given the complexity and potential for significant financial and legal consequences, it is crucial to seek professional legal advice before considering abandonment. A franchise lawyer can help you:

• understand your specific situation and obligations under the franchise agreement;
• explore alternatives to abandonment, such as negotiated exit strategies;
• assess the potential risks and liabilities associated with abandonment; and
• guide you through the process of exiting your franchise in a way that minimises your risks and liabilities, if necessary.

While abandonment might seem like a quick solution, it often leads to more problems than it solves. Always try to negotiate an exit with your franchisor first, and only consider abandonment an absolute last resort after carefully considering all other options.

Key Takeaways 

Exiting a franchise can be challenging, as most agreements do not allow franchisees to terminate at will. However, there are three main options to consider:

1. Cooling-Off Period: Franchisees can exit within 14 days of signing the agreement without penalty. After this period, breaking the contract usually requires compensation or selling the business. 
2. Franchisor’s Breach: If the franchisor violates the agreement, such as failing to provide support or misrepresenting financials, you may have grounds for termination. 
3. Abandonment: Walking away from a franchise can result in severe legal and financial consequences, including liability for ongoing fees, breach of contract claims and disputes over non-compete clauses. 

Each approach comes with risks, so you should carefully assess their situation and seek professional guidance before proceeding.

If you are leaving your franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions