“I want out of my franchise. What do I do now?”
It is one of the most common questions franchise lawyers receive.
Sometimes a franchise simply does not work out. The location may underperform. Personal circumstances may change. The relationship with the franchisor may deteriorate. In other cases, the franchisee simply decides that the business is no longer aligned with their personal or financial goals.
Whatever the reason, many franchisees assume they can simply notify the franchisor that they are leaving, hand back the keys and move on.
Unfortunately, franchise exits are rarely that simple.
A franchise agreement is a long-term contractual relationship and, in most cases, exiting requires careful planning, a detailed review of the franchise documentation and a clear understanding of both your rights and your ongoing obligations.
First Things First: Do You Actually Have a Right to Exit?
The starting point is always the franchise agreement itself.
Most franchise agreements are drafted for a fixed term and do not provide the franchisee with a general right to walk away whenever they choose. Whilst there are exceptions, it is common for franchise agreements to be structured so that the franchisee commits to operating the business for the full term of the agreement.
Accordingly, before taking any action, the first question to ask is:
“Does my agreement actually allow me to terminate?”
If the answer is yes, that is excellent news. The next step is to carefully review the termination clause and ensure that any notice requirements are strictly complied with. It is surprising how often franchisees have a contractual right to terminate but inadvertently create issues by failing to follow the process prescribed by the agreement.
If the answer is no, the position becomes more nuanced.
That does not necessarily mean you are trapped in the franchise indefinitely. It simply means you need to consider alternative exit strategies.
What If There Is No Right to Terminate?
Where there is no express right of early termination, franchisees generally find themselves considering one of three options.
The first is simply to continue operating until the agreement expires naturally. Whilst this may not be the preferred outcome, it is sometimes the most commercially sensible option, particularly where only a relatively short period remains on the term.
The second is to sell the franchise business. Most franchise agreements permit a sale, subject to the franchisor’s approval of the incoming purchaser and compliance with the transfer provisions in the agreement. For many franchisees, a sale produces a significantly better financial outcome than simply walking away.
The third option is to request an early exit.
The Franchising Code of Conduct contains a process which allows franchisees to request early termination. Importantly, this is not an automatic right to terminate. Rather, the franchisee may submit a formal request and the franchisor must consider that request and respond in accordance with the Code.
In practice, many franchise exits occur through commercial negotiation rather than strict legal rights. A well-prepared early termination request, supported by appropriate evidence and a practical transition proposal, can often provide a pathway to a sensible commercial resolution.
The Biggest Mistake Franchisees Make
One of the most common misconceptions is that once the franchise agreement ends, the obligations end too.
In reality, the expiry or termination of a franchise agreement often triggers a substantial list of obligations that must be completed before the relationship is truly over.
Many franchise agreements contain extensive provisions dealing with what must occur immediately following termination or expiry. These provisions are designed to protect the franchisor’s brand, intellectual property, customer relationships and network.
In practical terms, franchisees should expect to be required to stop trading under the brand, cease using trade marks and intellectual property, return operations manuals and confidential materials, transfer digital assets such as websites and social media accounts, pay any outstanding amounts owing to the franchisor and cooperate with the transition of the business.
The premises themselves frequently become a major issue. Depending on the structure of the arrangement, the franchisee may be required to vacate the site, remove equipment, reinstate the premises, surrender the lease or facilitate a transfer of occupancy back to the franchisor.
Many agreements also allow the franchisor to recover its costs if the franchisee fails to complete those obligations properly.
Accordingly, termination should not be viewed as a single event. It is more accurately viewed as a transition process that often continues for weeks or months after the formal end of the agreement.
Don’t Forget the Lease
The lease position is frequently one of the most important parts of any franchise exit.
If the franchisor controls the lease, the transition process may be relatively straightforward.
However, where the franchisee holds the lease directly, there may be additional obligations to assign the lease, facilitate a transfer to the franchisor or procure a replacement tenant.
Many modern franchise systems also utilise Step-In Deeds. These documents often grant the franchisor rights to assume control of the premises following termination and can significantly affect the franchisee’s exit options.
Before taking any steps, it is therefore essential to understand exactly who controls the site and what rights exist under the lease documentation.
Fitout, Equipment, Stock and Customer Data
Another area that regularly surprises franchisees is the extent to which the franchisor may have rights in relation to business assets.
Many franchise agreements provide the franchisor with rights to inspect and purchase stock, equipment, promotional materials and elements of the fitout at the end of the relationship.
Likewise, ownership of customer information is often misunderstood.
Many franchisees assume they own the customer database because they generated the customers. However, franchise agreements frequently provide that customer records, loyalty programs, CRM systems and related data belong to the franchisor.
The same issue commonly arises in relation to websites, domain names, social media accounts and business email addresses.
These assets should be reviewed carefully before any exit strategy is implemented.
Some Obligations Continue Long After the Franchise Ends
Even after the business has closed or been sold, certain obligations will typically survive.
Confidentiality obligations almost always continue.
Intellectual property obligations almost always continue.
Restraint of trade provisions frequently continue.
Whether a particular restraint is enforceable will depend on the wording of the clause and the surrounding circumstances, however franchisees should never assume that they are free to immediately establish a competing business without first obtaining advice.
This is particularly important where the franchisee intends to remain in the same industry or continue operating from the same location.
Why Legal Advice Can Be Critical
Seeking advice before taking action can often save substantial time, cost and stress.
This is particularly true where:
- you wish to terminate before the end of the franchise term;
- you intend to continue operating in the same industry;
- you wish to remain at the site following termination;
- there is a dispute with the franchisor;
- money remains owing to the franchisor;
- there are personal guarantees in place;
- the franchisor is seeking to enforce restraint provisions; or
- there is uncertainty regarding ownership of the lease, fitout, equipment or customer database.
In many cases, the legal position is far more flexible than franchisees initially assume. Equally, seemingly simple decisions can create significant problems if implemented without understanding the agreement.
Franchise Exit Checklist
Before taking any steps to exit a franchise, consider the following:
✓ Do I have a contractual right to terminate?
✓ If not, should I continue trading, sell the business or request early termination?
✓ What notice requirements apply?
✓ Who controls the lease?
✓ Is there a Step-In Deed?
✓ Can the franchisor take an assignment of the lease?
✓ Does the franchisor have rights to acquire stock, equipment or fitout?
✓ Who owns the customer database?
✓ What happens to websites, social media accounts and domain names?
✓ Are there outstanding franchise fees or other debts?
✓ What confidentiality obligations survive?
✓ What intellectual property obligations survive?
✓ Does the agreement contain restraint provisions?
✓ Have I obtained legal advice before commencing the exit process?
Final Thoughts
Exiting a franchise is rarely as simple as deciding to leave.
The most successful franchise exits are carefully planned, strategically negotiated and implemented with a clear understanding of the franchise agreement, lease documentation and post-termination obligations.
Whether you are considering selling, terminating or simply planning ahead, understanding your rights and obligations early can make the difference between a clean exit and a costly dispute.
If you are considering exiting a franchise, seeking advice before taking action is often the best investment you can make.