Whether a franchise relationship ends by expiry, sale, or termination, the exit process can be one of the most challenging, and financially consequential, phases of the franchise lifecycle. Planning for the end from the very beginning of the relationship is essential.
A franchise agreement will typically set out the franchisee’s obligations on termination or expiry: returning operations manuals and confidential materials, de-branding the premises by removing all signage, trade marks, and branded materials, complying with restraint of trade clauses, and meeting ongoing confidentiality obligations. These obligations can involve significant cost and effort, particularly where premises need to be restored to their original condition under a “make good” provision in the lease. Franchisees should be aware that terminating the franchise agreement does not automatically terminate any associated lease (as these are separate legal arrangements) and a franchisee may remain liable for rent and outgoings even after the franchise ends.
One important option for franchisees looking to exit is selling the franchise business. Franchise agreements commonly allow for assignment, but almost always require the franchisor’s prior written consent. Some agreements also give the franchisor a first right of refusal. Since the franchisor can withhold consent to a proposed sale (subject to acting in good faith and reasonably), it is critical for franchisees to understand these provisions before relying on a sale as their exit strategy.
The question of goodwill is often contested. Goodwill refers to the market value added to the business by the franchisee, for example, by building a loyal customer base. However, in franchising, franchisees frequently have limited contractual rights to goodwill at the end of the term, and the extent to which goodwill belongs to the franchisee versus the franchise system can be highly contentious. Under the new Code, restrictions on restraint of trade clauses that apply when the franchisor refuses to renew are designed to give franchisees greater freedom to continue operating in similar industries after the franchise ends, provided certain conditions are met.
Post-termination disputes are common, typically arising from disagreements about de-branding obligations, final accounting, return of deposits or bonds, and the scope of restraint of trade clauses. The best way to minimise these disputes is to maintain accurate and complete records throughout the life of the franchise, to understand your exit obligations well before the end of the term, and to seek professional advice early in the process.
Practical Takeaways
- Plan for the end from the beginning. Before signing a franchise agreement, understand the termination and expiry provisions, your obligations on exit, and whether your lease is linked to the franchise term.
- Maintain thorough records. Accurate documentation of financial performance, communications, and compliance throughout the franchise term will facilitate a smoother exit and protect your position in any disputes.
- Seek advice early. Whether you are considering selling, negotiating an early exit, or approaching the end of your term, professional legal and financial advice at the earliest opportunity will help you protect your investment and avoid costly mistakes.
The exit process, whether by expiry, sale, or termination, carries real legal and financial risk for both franchisors and franchisees, and the decisions made in this phase can have lasting consequences. If you are approaching the end of your franchise term, considering a sale, or dealing with