Exiting a Franchise Business
Exiting a franchise is not always straightforward. Franchise agreements are typically set for a fixed term, and walking away from the business without following the proper legal steps can expose you to significant liability.
Risks of Abandoning the Franchise
If you abandon your franchise business while still bound by a fixed-term franchise agreement, you may be held liable for:
- Unpaid rent, as stipulated in the lease agreement
- Ongoing franchise fees, as outlined in the franchise agreement
- Immediate termination of the franchise agreement and potential legal action for breach
Franchisees considering an early exit must understand the legal consequences and explore available options to exit in a compliant and commercially reasonable manner.
Legitimate Ways to Exit a Franchise
While an early exit is challenging, there are options available to franchisees. All of these require communication and negotiation with the franchisor. Common strategies include:
- Negotiating an early termination of the franchise agreement
- Assigning or selling the franchise business to another party
- Exiting on the basis of a franchisor breach, where the franchisor has failed to meet obligations under the Code, legislation, or the franchise agreement
Negotiating Early Termination
Under the Franchising Code of Conduct, a franchisee may propose early termination of the franchise agreement. Once a written request is submitted, the franchisor must respond in writing within 28 days.
If early termination is agreed upon, a Deed of Surrender and Release is usually required. This deed formalises the termination and releases the franchisee (and any guarantors) from further obligations under the agreement.
Selling or Assigning the Franchise Business
Franchisees have the right to sell or assign their franchise business, provided specific conditions are met under the Code:
- A written request for consent must be submitted to the franchisor
- The franchisor must provide written consent to the transfer
The franchisor cannot unreasonably withhold consent. However, they may lawfully refuse the transfer if, for example:
- The proposed buyer cannot meet financial obligations
- The buyer fails to meet reasonable franchisor requirements
- The franchisee has unpaid debts or has otherwise breached the agreement
Exiting a franchise requires careful legal planning to avoid unnecessary liability or disputes. Seeking advice before taking any steps is essential to protecting your interests and ensuring compliance with the franchise agreement and relevant legislation.
Frequently Asked Questions
Can I leave my franchise early?
Yes, but it must be done through legal means such as negotiation, selling the business, or demonstrating a franchisor breach.
What happens if I just walk away?
You may still owe:
- Franchise fees.
- Lease payments.
- Possible damages for breach of contract.
Can I sell my franchise to someone else?
Yes. You’ll need the franchisor’s consent, which cannot be unreasonably withheld if certain conditions are met.
What’s involved in negotiating early termination?
We help prepare and submit a formal request. If accepted, both parties sign a Deed of Surrender and Release.