Potential Problems Breaking Franchise w/no Contract?

Say a franchise wants to discontinue using the name and establish a new identity. There is no existing contract or agreement whatsoever. There are no recipes or propriety products involved. Royalties have been paid on a monthly basis to this point.

So, take the sign down and pay royalties to that point. Any potential problems that could arise?

That really depends. Are you the franchisee or the franchiser?


There was a guy here that did that and the court order that came from the legal action against him was:[list]He was required to remove all traces of the franchise including the general decor ie: paint colors, flooring, counters,signs etc.
He was required to change phone numbers
All POS hardware and software (including the customer data base) had to be given to the franchisor


How can you be a franchisee without a contract?

The franchise contractual relationship is defined and legally established by the Franchise Agreement (FA), which delineates what the requirements of both parties are, including the causes for and procedures for termination.

Right of 1st refusal and covenant “not to compete” clauses are pretty standard.

This should always favor the franchisor, as the franchisor is concerned mainly with the protection of its name, image, and operating system.

Somebody, somewhere back in time must have signed such a thing.

A local guy in a different food concept recently told the franchisor to “get lost” as he was receiving no real support, and he was really struggling. Turned out it was a franchise that once had a “big name” but had long since been operated professionally. They will probably never follow up on it, as the wheels seem to have pretty much fallen off the vehicle.

Another local guy, in the pizza business, closed down a regional pizza franchise, re-opened it 12 miles away as an independent, and he was served with a lawsuit, which resulted in a court injunction (required to close and stay closed until a certain date, probably related to non-compete covenant) and fines (may have been court costs, as I know my agreement states that loser pays). He was playing games, putting it in his wife’s name, etc. which didn’t stop the big city lawyers for a second. I was kind of surprised as I haven’t been all that impressed with that franchise, but they sure knew how to enforce their rights as a franchisor.

You need to do your homework here because there is potential for loss. If it’s a sorry franchise and they haven’t lived up to their end of the bargain, there are ways spelled out in the FA to address this, and ultimately dissolve the relationship.

If there is no FA (and you’re sure of this), then they could potentially be in big trouble for "operating a franchise without being a franchise (providing full disclosure in UFOC/FDD and having an FA) ". My understanding of this is basically if it walks like a duck, quacks like a duck, it is a duck. But it is amazing how the term “franchise” is generally thrown around without understanding the legal definition. (Many people aournd here thought that by opening a second store, I had franchised myself. How little did they know!)

Bottom line , if there’s a name, a system, fee (and or royalties), there’s a franchise. It is either operating legally (with UFOC/FDD provided prior to agreement, and properly executed FA) or illegally. (IMHO of course)

Best of luck!

The franchisor is/has been very unprofessionally run. Location was purchased from a prior franchisee. No contract was ever signed and they have “never” lent any support in any form – even when it was seeked out. Last few years they have lost other franchises and now have lost their home, cars and sold or are closing some of their own stores.

They have no established decor and no POS system was even present at the time of purchase. They had no influence or part in the decision process when it was purchased either.

I’ve heard of the “phone number” thing which obviously is a big concern.

Sounds like from the above comments, meeting with a lawyer first would be appropriate.

I think I would check with a lawyer right away as well. If it looks like you have a good chance of loosing your phone number you may want to be proactive and just go ahead and change it now. This way you control the old number and can route it to your new one until most of your customers learn of the new one. I think I would take some pictures of the store “as is” as well, and then maybe slowly change the decor into your own to start you own brand in order to show how different you are. If you are thinking of any changing your menu at all, products, or supplier, now would be a great time for that as well. Document every single thing that goes on between you and the Franchisor as well. Oh yeah, and make a hard copy of your customer list and anything else you may want out of your POS. Good luck!


It ought to be a short meeting.

I’d think that all franchising agreements would require any assignments (transfers) to be approved by the franchisor in writing prior to the actual purchase (transfer). Additionally, and I’m reading from my FDD which is current, the transferee must assume the Agreement (FA) with a written assumption agreement

“in addition to executing such other documents as the Franchisor may require, without limitation, a new franchise agreement in the form of the then-current franchise agreement used by Franchisor in order to assume all of the obligations of this Agreement, to the same extent, and with the same effect, as previously assumed by the assignor;”

No Agreement=no contractual relationship

No contractual relationship=no franchise

Sound like a franchising organization on its way to the graveyard. Just make sure you haven’t signed anything that they could use to prove the relationship. (Do you have a copy of the UFOC anywhere which spells out the obligations of the franchisor/franchise owner? I suspect they haven’t updated it in some time, as they are probably no longer offering franchises for sale. Item 3 of the FDD/UFOC requires the Franchisor to disclose any litigation they are or have recently been involved in.)

Probably a good idea to be pro-active on the phone number, or at least ready to address it if needed. Although from the sound of things, they probably couldn’t begin to mount a legal challenge, and probably have a few unpaid legal bills along with their mortgages and car loans.

Good luck!