Making A Graceful Exit From A Franchise
By Cliff Ennico
www.creators.com
"I bought a franchise a little over two years ago. I've followed the franchise plan to the letter, but so far I haven't made any serious money, and have barely recouped my investment. Some other franchisees in my area are having the same difficulties, but others are doing quite well. I've decided I really want to move on to other things, but can't figure out how to get out of the franchise. Can you help?"
There are many reasons why franchises sometimes don't work out. The most common are:
the franchisee (that's you) didn't have the necessary skills to run the business, or didn't market the franchise aggressively enough because he believed the franchise trademark would do all of the work for him;
the franchise territory wasn't a good one - many franchises that start out in low-cost areas of the country "hit a wall" when they expand into areas where labor, real estate and other expenses are significantly higher; and
the franchise was poorly managed, grew too fast, or otherwise launched its model before it was truly tested.
In any case, it's highly unlikely you will get your upfront franchise fees back. Just about every franchise agreement says these are "nonrefundable". Also, many franchise agreements (including, I suspect, yours) do not allow you to terminate the franchise relationship if things turn sour.
Getting out of a franchise is a four step process - all require patience, and a fair amount of time.
Ask for Additional Training
. The fact that some franchisees in your area are doing well may point to some deficiencies in your skills. Ask the franchise to evaluate your operation, and volunteer for additional training that may help you work your way through your current difficulties.
Re-Negotiate Your Territory
. It's quite possible that your territory isn't right for this type of franchise. Have the franchise send one of its real estate executives to your territory and look for ways to "redraw" it so as to be more productive for you. Many franchises will do this for no charge beyond the executive's out of pocket expenses.
Find a Buyer
. If you truly believe that there's nothing you or the franchise can you to improve your situation, then it's time to head for the exit. Let the franchise know you are willing to sell out, and (if the franchise agreement doesn't already provide for this) offer them a "brokerage commission" if they find a buyer. Contact all of your local franchise brokers - the best ones are members of Franchise Network (
www.frannet.com
), The Entrepreneur's Source (
www.esource.com
) and FranChoice (
www.franchoice.com
) - business brokers, commercial real estate brokers, and outplacement centers (where laid-off corporate executives with large severance packages are just dying to buy a local small business). Take out a "Business for Sale" ad in the classified section of all local newspapers, as well as online resources such as Craigslist (
www.craigslist.org
).
Hand Back the Keys
. Even though the franchise agreement doesn't give you an "out" if the franchise doesn't work, almost all franchises will let you out of your franchise and set you free on the following conditions:
you agree not to sue the franchise, and to release them from any liability they may have to you;
you pay all money that's due to them, and don't ask for any of your money back;
you return the franchise Operating Manual and all materials that have the franchise's name and logo on them; and
(most importantly) you agree to comply with the noncompete provisions in your original franchise agreement - these generally will prohibit you from engaging in the same or a similar business within an X-mile radius of ANY of the franchise's franchisees for a period of Y years.
Take the Franchise to Court
. When all else fails, you may have to consider going to arbitration or filing a lawsuit against the franchise. Before doing so, you should talk to an attorney who specializes in franchisor-franchisee litigation - preferably one who has sued this particular franchise before, and won. Review the "litigation" section of the franchise's Uniform Franchise Offering Circular (UFOC), contact franchisees who have sued the franchise, and ask them for the name of the attorney who represented them.
In order to win any sort of litigation against a franchise, you will need to prove clearly either that the franchise committed fraud when it sold you the franchise (i.e. it knew the franchise model was a dud), or that the franchise failed to provide you with the support promised in your franchise agreement. Keep in mind that in most states the statute of limitations for "breach of contract" cases such as this is relatively short - usually only two or three years after you signed your franchise agreement. And your franchise agreement will require you to bring the suit where the franchise's headquarters is located, and where the cards will be stacked in the franchise's favor.
If other franchisees are as disgruntled as you are, consider filing suit jointly - you will look a lot stronger, and will be able to share the considerable expenses involved.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
