Buying a franchise is not a guarantee of success. Many franchisees barely earn enough to pay themselves a modest salary, and some never become profitable. Of course, the pandemic has forced many franchisees into the red as well. If your franchise isn’t profitable, is there a way out? Franchise attorney Jeffrey M. Goldstein explains.
Most Franchisees Can’t Simply Walk Away
In most cases, franchisees can’t simply walk away. As a franchisee, ceasing operations puts you in default of your franchise agreement—and this can trigger a host of undesirable consequences. Your franchisor will have grounds to terminate your franchise agreement; and, once it does, it will be able to enforce the agreement’s post-termination obligations. If your franchise agreement contains a “lost future royalties” or liquidated damages clause (as many franchise agreements do), you may be liable for the fees you would have paid had you continued operating.
This doesn’t apply if you are able to wait out your franchise agreement’s term. If you can make it to the end of the term without facing financial ruin, then you can simply choose not to renew.
Can You Sell Your Franchise?
What about selling your franchise? While this technically is an option, finding a buyer will likely prove challenging. But, with the help of a broker, you may be able to find an experienced operator that believes it can turn your franchise around. If you are able to find a buyer (and if your franchisor approves the transfer), this could be your best option.
Will Your Franchisor Buy It Back?
In some cases, franchisors will buy back franchises from underperforming franchisees. But, before you explore this route, keep in mind what you are asking your franchisor to do.
If your franchise isn’t profitable, your franchisor knows it isn’t profitable. Your franchisor also knows that you are likely on the brink of default. So, should it buy back your franchise? Or, should it simply wait until it can take your franchise back for free—and potentially sue you for lost future royalties?
Can You Negotiate an Amicable Resolution?
In many cases, the best option for unprofitable franchisees will be to try to negotiate an amicable resolution. Ultimately, franchisors don’t want underperforming franchisees in their systems, and they also don’t want to disclose failed franchises in their Franchise Disclosure Documents (FDDs). While many franchisors will not hesitate to sue failed franchisees, these franchisors also know that the likelihood of actually recovering damages in these lawsuits is often limited.
If your franchise is struggling, it is worth considering all of your options. The best path forward will depend on your individual circumstances. You will want to formulate a strategy sooner rather than later, as protecting yourself can become much more difficult once your franchisor terminates your franchise agreement for cause.
Schedule a Free Consultation with Franchise Attorney Jeffrey M. Goldstein
Is your franchise unprofitable, and are you looking for a way out? If so, we encourage you to contact us for help. To schedule a free and confidential consultation with franchise attorney Jeffrey M. Goldstein, call 202-293-3947 or send us your contact information online today.
