Getting Out of Your Franchise

There are risks and rewards to getting out of a franchise agreement that is burdensome or that you no longer feel is right for you.

The easiest way to get out is to sell your franchise – to another franchisee, to a new owner or to the franchisor. You should explore this possibility before you consider getting out on any other basis, even if it means taking a loss on the sale of your business.

You need to consider these risks as well as your right to get out of the agreement.

Risks of Getting Out of Your Franchise

Covenant Not to Compete. Most franchise agreements contain covenants not to compete, meaning that when the franchise ends, you cannot continue in the same business for a period of time in the same area that you have operated your franchise. These covenants usually can be enforced by the courts, and they are usually written so that you cannot easily get around them – say, for example, by “selling” the business to your brother-in-law.

At the same time, however, if the franchisor has breached the agreement in serious ways; if it has systematically failed to enforce other covenants not to compete; if you live in certain states that do not enforce these covenants, you may be able to avoid them. You will need good advice from and experienced franchise lawyer in order to know the likelihood of this happening.

Future Royalties. Sometimes franchisors will contend that if you leave the franchise system before the agreement terminates or expires, you are responsible for paying the franchisor the royalties that you would have paid to it for the remaining term of the agreement. In other words, if you get out in the seventh year of a ten-year franchise, the franchisor may want three years worth of royalties.

Courts have reached different conclusions on whether franchisors can recover damages such as this. Your franchise agreement may or may not provide for the franchisor to get such damages. Courts have reached different results on this issue – some courts say that the franchisor can recover these damages, and some courts have rejected them. You need to talk to a franchise lawyer, who will review your agreement and local law, in order to know your rights in this regard.

Franchisor’s takeover of Your Premises. Some franchise agreements state that whenever the relationship between the franchisor and franchisee ends, the franchisor may exercise an option to take over your business – sometimes at a very low price. This may especially be true if the franchisor is your landlord. Again, your rights depend on what the franchise agreement says and whether the franchisor is in a position to purchase your franchise.

How do I know if I can get out?

Your ability to get out of your agreement depends upon many factors: what your franchise agreement says; how the franchisor has treated you; whether you are in compliance with your agreement; and what state you are in. You will need a very careful and thorough review of your rights by a knowledgeable franchise lawyer.