Most franchisees prefer to sell or renew rather than simply walk away, since an operating location generally has value.
Preparing for the End of Term
- Franchisor Notification: Many agreements require the franchisor to notify you if you're eligible for renewal within a set window (e.g., 12-18 months before expiry).
- Franchisee Decision Point: You decide whether you want to: Renew, Sell/Transfer, or Exit
If You Renew
- Application for Renewal: You'll confirm your intention to renew within the notice period (often 6-12 months before expiry).
- Conditions:
- Sign the current version of the franchise agreement (be sure to review this carefully as terms may have changed).
- Pay a renewal fee - usually lower than the initial franchise fee.
- Renovate/upgrade your premises to current brand standards.
- Confirm you're in good standing (all fees and royalties up to date).
- New Term Begins: Typically, another 5-10 years.
If You Sell/Transfer
- Find a Buyer: Either on your own or with the franchisor's help.
- Franchisor Approval: Buyer must meet financial/operational criteria.
- Transfer Fee: Paid to the franchisor for handling the process.
- Buyer Signs New Agreement: The new franchisee takes on obligations under the franchisor's current contract.
- Right of First Refusal: There may be a clause in your contract that allows the franchisor to purchase your business on the same terms as your buyer's offer.
If You Exit
Be sure that you have a clear understanding of your contract when considering this option.
If you close a franchise without reselling it, there could be financial penalties, such as termination fees or liquidated damages, which should be spelled out in your franchise agreement. If you plan to exit before the end of term, you could also face breach of contract litigation by the franchisor.
Even if you decide to exit at the end of your agreed-upon term, you should consider the potential loss of your initial investment, having to pay outstanding debts and fees, and post-termination clauses like non-competition clauses. It's best to discuss this with an experienced franchise lawyer before moving forward on this option.
- Business Closure: If you don't renew or sell, you wind down operations.
- De-branding: You must remove all franchisor trademarks, signage, and materials.
- Post-Term Obligations:
- Non-compete clauses may restrict you from operating a competing business for a set time and region.
- You may still be liable for any outstanding debts or obligations.