You buy the franchise, you work hard, but for whatever reason, you end up facing a scenario where your franchise is only bringing in losses. What do you do? Can you get out of the agreement?

There are a number of options for getting out of the franchise agreement. However, each of these comes with its own set of risks and consequences and must be carefully assessed on the merits of personal circumstances.

1. Abandoning your business

Subject to the lease requirements, you may naturally simply want to close the doors of your business and walk out.  However, please note that if you do that, you potentially face the following actions:

• The franchisor immediately terminating your franchise agreement, as the franchisor is entitled to do according to the Franchising Code of Conduct;
• The franchisor pursuing you for the fees it would otherwise receive during the remainder of the term of the franchise agreement;
• The landlord pursuing you for breaking the lease and for rent and outgoings until the end of the term of the lease; or
• If the franchisor is the tenant on the lease, you being pursued by the franchisor under the licence or sub-lease that you hold with them for unpaid rent and outgoings until such time as a new franchisee is secured.

2. Communicating with the franchisor and agreeing to terminate the franchise agreement

Franchisors may be open to negotiation to let a franchisee terminate the franchise relationship.  This may mean that:

• The franchisor will require an exit payment; or
• The franchisor may, in some circumstances, offer you an exit payment to amicably part ways and to get you out of the franchise system.

In both of the above circumstances you will be asked to sign an agreement surrendering your franchise agreement from a particular date. That agreement will usually contain a release of the franchisee entity (whether corporate, trust or individual) and, if applicable, for the guarantors who have guaranteed the performance of the franchisee in the franchise agreement.

Lawyers may be best placed to help negotiate a positive outcome in these circumstances, particularly if what is being managed is a serious dispute or potential dispute with the franchisor.

In addition, if there is a threat of insolvent trading, it may be worthwhile to involve your accountant early on.

3. Selling your business

Attempting to sell your business, albeit for a reduced sum, to a third party, with the consent of the franchisor.

You may attempt to sell your franchise business to.  Remember that any sale of a franchised business must be approved by your franchisor.

In many systems the franchisor has the right of first refusal to buy the franchisee’s business. And there are often transfer fees payable to the franchisor upon a sale of the franchisee’s business.

In certain cases, the franchisee’s failure in business may be due to an action of the franchisor or misrepresentations made by the franchisor at the time of the franchisee entering into their franchise agreement.

In such circumstances there may be legitimate grounds for the franchisee to terminate their franchise agreement and even recover (through legal proceedings) the funds invested from the franchisor.  However, misrepresentation actions are typically difficult to prove in court and should only be pursued if there is adequate evidence.

Seek legal advice

Regardless of how your franchise agreement is terminated, there will be consequences of termination, which will include, amongst others, ceasing to use and returning to the franchisor all materials containing the franchisor’s intellectual property. In many cases, there may be restraints, which may prohibit you from competing with the franchisor in a particular area for a particular period from the termination date.

We recommend that you consult with a franchise lawyer prior to taking any step in exiting your franchise agreement to ensure your risks are managed and to optimise the outcome of a precarious business situation.

Jane Garber and Ilya Furman: www.franchiselegal.com.au