If your franchise system is struggling, you may wonder if you can abandon your franchised business. For instance, your franchise might be facing legal claims or struggling to make a profit. However, before you do, you should consider other options available to mitigate any losses or penalties you may incur. This article explores various ways to leave your franchise business without breaching your franchise agreement.
If you are bound to your franchise agreement for a fixed term, it is unlikely you have the right to terminate your franchise agreement before the term expires. Furthermore, you may face several issues when going down this path, including:
- liability for the unpaid rent arising from either the landlord or the franchisor, under your lease or licence to occupy premises (if you operate from premises);
- liability to the franchisor for the ongoing fees you owe for the remainder of your term (by way of a damages award for breach of contract); and
- termination of your agreement by the franchisor effective immediately. Further, the franchisor may seek to enforce any restraint provisions or other obligations arising on termination.
How to Exit Without Abandoning the Franchise
Abandoning your franchise might be tempting. However, there are other options you should consider that would mitigate the losses you may be liable for under your franchise agreement. These options include:
- negotiating with the franchisor, including issuing an early termination request;
- assigning or selling your franchise business;
- making a claim against the franchisor (if one is available) and leveraging that to negotiate an exit on agreed terms.
Negotiations With the Franchisor
If you're franchised business is struggling to generate a profit, speaking to the franchisor can help. Your profitability and success directly impact the franchisor. As such, it is in the franchisor's interest to do what they can to help address the issues you are facing. Furthermore, subject to the terms of your franchise agreement, the franchisor must likely provide you with support and guidance throughout your franchise term.
Request for Early Termination
Alternatively, if further support cannot resolve the issues you are facing, you may wish to request early termination of the franchise agreement. Under the Franchising Code of Conduct ('the Code'), you have the right to propose an early termination of the franchise agreement and the early termination terms. The franchisor then must provide you with a written response to your proposal within 28 days.
The franchisor's response cannot simply be a refusal. Instead, they must specify why they are refusing your request, keeping in mind the obligation of acting in good faith.
If the franchisor consents to your early termination, you should enter a deed of surrender and release. This will ensure the franchisor (or any appointed administrator or liquidator) cannot seek to recover monies from you or enforce other operative terms subsequently.
Additionally, the deed should release you and any guarantors from the obligations under the franchise agreement. Moreover, you should obtain legal advice on this document before signing.
Selling/Assigning the Franchise Business
Under your franchise agreement, you will likely have the right to request the sale of your franchise business, subject to specified conditions. However, in any case, this right exists under the Code. Therefore, per the Code, you must follow the process below.
Request Consent From the Franchisor
If you wish to sell your franchised business, you must first request consent from the franchisor. Further requirements include:
- making this request for consent in writing;
- the request must be accompanied by all information that the franchisor may reasonably require and expect to be provided to make an informed decision; and
- if the franchisor requires further information to make an informed decision, the franchisor may make a request.
Receive the Franchisor's Consent
After making a request, you must wait until you receive the franchisor's consent before you move forward. In this case:
- the franchisor must advise in writing if they do not give their consent and provide reasoning;
- the franchisor must also advise if they give their consent and whether or not it is subject to any conditions; and
- the franchisor must provide its response within 42 days. Otherwise, you can assume consent has been provided.
The Franchisor Cannot Unreasonably Withhold Consent
Although the franchisor can decline your request, they cannot unreasonably withhold consent. In this case, the franchisor:
- is prohibited from unreasonably withholding consent for the sale of your franchise business; and
- may reasonably withhold consent in the following circumstances:
- where it considers that the proposed purchaser will be unable to meet the financial obligations under the franchise agreement or otherwise does not meet a reasonable requirement or selection criteria of the franchisor;
- the franchisee has not paid amounts owing under the franchise agreement or is otherwise in breach of the franchise agreement.
As a franchisee, the Code provides you with significant protections concerning your right to request a sale of your franchise. However, if you want to sell your franchise, finding an appropriate purchaser is one of the major obstacles you may face.
The ability to sell the franchised business will depend on it being a desirable purchase. If you sell a failing business, you must be careful not to oversell the offering.
Agitate an Available Claim Against the Franchisor
In some cases, you may be looking to exit the franchise because the franchisor has engaged in misleading or deceptive conduct or failed to provide the required disclosure (which may have alerted you to the decline). For example, consider the following scenario.
A franchisor told you that all of the networks 'were performing well and profitable', and they saw no threat to the ability of the franchisees to remain profitable. In reliance on that representation, you entered into the Franchise Agreement, expecting to be profitable and perform well similarly. However, when making this representation, the franchisor was aware of a sudden downturn in franchisee sales and that some franchisees wished to exit the system. In this case, the franchisor's statement was not accurate.
In the above scenario, you could claim misrepresentation and misleading and deceptive conduct against the franchisor and seek appropriate remedies. This might occur through the prescriptive resolution procedure per the Code.
If you have a successful case, you may be able to exit your franchise agreement and recoup any losses from your investment. As such, we strongly recommend you speak to a specialist franchising lawyer if you think this may apply to you.
Many factors can influence the decline of a franchised business. Sometimes, neither the franchisor nor the franchisee can anticipate it. For instance, consider the multi-billion dollar franchise, F45.
This franchise system once prided itself on its protected and unique model. However, after a four-year legal battle with its competitor Body Fit Training (BFT), the New South Wales Federal Court deemed two of its patents invalid. The decision can significantly impact the franchise system and its franchisees.