The Easier Way Out
If you have no claim against the franchisor for breaking any of the terms outlined in the franchise agreement and simply wish to exit the franchise, your best option is to sell. At the onset, you will want to set up a meeting with the franchisor to outline your reasons to sell. There will be some limitations, restrictions, or terms in how the selling process is to be conducted – often referred to as a “transfer” in the franchise agreement.
The transfer clause will outline all the conditions you must fulfill before the franchisor gives the approval, such as being up to date with all your royalty payments. The transfer process can take several months to complete. During this time you will still be responsible for operating the franchise without interruption or compromising any of the terms of your agreement.
Profitability Issues
If your decision to exit involves profitability issues, you may be crossing the line into agreement dispute. This means that you are raising a claim against the franchisor for not meeting a legal requirement of the UFOC, franchise agreement, or for an action or decision made by the franchisor that led to your operational disadvantage.
In other words, if your franchise is not making enough money and you believe that the franchisor is at fault, your claim will lead to a process known as mediation or arbitration. The franchisor should make an attempt to resolve or “cure” the situation before it goes into third party hands.
Be aware, though, that profitability issues will lean in favor of the franchisor, especially if the franchisor can prove that your performance as a franchisee is the reason for poor profitability.
Franchisor Default
If you believe that the franchisor has defaulted on the franchise agreement that has ultimately led to your franchise’s failure, you may have a good case to terminate the agreement.
Claims made against franchisors can involve poor site selection, limited training, or lack of ongoing support. The franchisor will likely attempt to rectify the situation by providing some sort of cure to keep you from pursuing a lawsuit that could lead to the closing of the franchise and ultimately, irreparable damage to the brand.
At best, if you do win the lawsuit you could be entitled to a full refund of your investment, but proving franchisor default is not that simple. Expect a long, drawn-out process that can be financially taxing and emotionally draining. To avoid such legal battles, established franchisors may purchase the franchise outright, knowing that the franchisee can be quickly replaced with an eagerly awaiting prospect.
