What Happens If a Franchise Location Fails?

If you’re reading this, things probably aren’t going according to plan. Sales might be down, expenses piling up, or maybe you’re falling behind on royalties. Any business venture comes with highs and lows, but what happens if a franchise fails? Whatever the reason, the reality is that some franchise locations don’t work out, and that’s more common than you think.

The good news? A failing franchise unit doesn’t necessarily mean game over.

In this article, I’ll walk you through what actually happens when a franchise location fails, including what it means for your future and how to get clarity on your next steps.

Key Takeaways

• There’s usually a gradual lead-up to franchise failure. So, watch for the slow-burn warning signs like falling sales and late or missed payments.
• No matter how bad things are, you still have options, from negotiating support to selling or closing. The key is to act as early as possible.
• Your financial and legal obligations can follow you even after you close down, so make sure you are clear on what you owe and what you need to do to protect yourself.

What Does Failure Look Like for Franchises?

Franchise failure doesn’t happen overnight. It usually creeps in over time rather than happening all at once. It might start with higher staff turnover before heading towards more serious cash flow problems. Here are some of the most common indicators that a unit is headed for trouble.

Sales and Growth Have Slowed or Stopped Altogether 

If your weekly or monthly revenue is slipping or completely flatlining despite your best efforts to turn things around, it’s a huge red flag. Seasonality or fluctuating revenue is not uncommon, but consistent decline usually means something is fundamentally broken. The reasons may not always be within your control. But keep a close eye on your numbers. Because the sooner you spot a pattern, the sooner you can intervene.

You’re Dipping Into Personal Savings to Stay Afloat

When profits start to drop, franchisees often try to push through the tough patch by covering expenses out of their own pocket. But these costs can add up fast, and in the long run, this is not sustainable. Draining your own savings just to keep the lights on might mean it’s time to hit pause and reassess. While this may save your business in the short term, overall, it’s a strong sign that your business model or the local market is no longer sustainable.

Mounting Debt or Missed Loan Payments

Unless you have access to enough capital to fully self-fund your franchise, you’ll likely take on some debt or financing to get started. But if your loan payments are stacking up or you’re getting late notices from the bank, you’re entering dangerous territory. Missed payments affect your credit, and mounting debt can make it difficult to run your franchise effectively.

Many franchise agreements include clauses that allow termination if you’re unable to meet financial obligations or face insolvency.

An FTC analysis from 2023 found that in the last decade, franchise borrowers have a 3.9% default rate in comparison to 3.5% for non-franchise small business owners.

Behind on Royalties or Fees

If you’re falling behind on royalty payments or other agreed payments like the marketing fund contribution, your franchisor will notice sooner rather than later. Over time, these missed payments can build up, and at a certain point, the franchisor will be well within their rights to terminate the franchise agreement.

During tough times, some bills will inevitably have to be prioritized over others, but missing your royalty payments or fees is a sure sign that your franchise is in trouble.

Staff Turnover Is Very High

Some industries naturally see more churn than others, but if you’re constantly hiring and re-hiring, it’s a red flag. This could be poor management or general low morale, but either way, turnover is expensive and should trigger you to investigate what’s behind it.

The average cost for hiring a new employee is nearly $5,000, so it goes without saying that it’s in your best interest to maintain your staff. 

Vendors Are Chasing You for Payment

As a franchise owner, you likely work with several third-party vendors, like food or beverage distributors, cleaning services, marketing agencies, or equipment leasing companies. If these vendors are consistently having to chase you up for payment, it might be a sign that your business is in trouble. An occasional late notice doesn’t necessarily mean you need to hang up your keys. But if it’s happening often, I highly recommend closely analyzing your cash flow.

Customer Reviews Are Slipping

Negative online reviews can be brutal to read, but they can give you valuable insight into your franchise’s reputation. If you once enjoyed higher ratings but, over time, they’ve started to decline, it’s a warning that something is off.

Like it or not, online reviews are a major part of your brand image. In fact, 95% of customers check online reviews before making a purchase, so a series of negative reviews can significantly deter potential customers and cause your franchise location to fail.

You’re Avoiding Calls From the Franchisor

I understand the temptation to bury your head in the sand and hope a solution comes your way. But avoiding your franchisor in the hope that things will miraculously turn themselves around is not a good move. It’s important to be transparent and honest with your franchisor.

Nine times out of ten, they will have systems in place to help you improve the business.

Can a Franchisor Shut You Down If Your Franchise Is Failing?

If you’re in breach of your agreement, the franchisor can terminate the contract. However, it usually takes quite a few missed royalty payments or violations of brand standards for things to come to this.

So, don’t expect your franchisor to jump straight to dissolving your franchise unit if your revenue doesn’t hit projections for a few months. But if you start missing royalty payments or damaging the brand’s overall reputation, termination is absolutely on the table.

Most franchisors will try to work with you first, but if things don’t improve (or you’ve gone dark), they can (and will) pull the plug.

That being said, it’s an extreme situation and typically a last resort. For example, 7-Eleven had only 26 terminations during a 10-year period compared to 75 abandonments (where the franchisee walked away), and 1,700 reacquisitions (the location was bought back by the brand). 

What Are Your Options If Your Franchise Is Failing?

Is your franchise struggling, and are you worried that you may be coming to the end of the road? You still have options. Here are my recommended steps for what to do if your franchise is failing.

Talk to Your Franchisor About Support and a Turnaround Plan

Your franchisor isn’t rooting for you to fail. After all, a struggling location hurts their brand and their royalties. Be honest with them and seek a proactive approach; you might be surprised at what they’re willing to offer.

Start by laying out exactly where things stand in terms of sales, debt, staffing, customer issues, etc. But don’t rely on frustration and feelings. Be prepared with data and figures to explain the situation. The more specific you are, the easier it is for the franchisor to help.

Any reputable franchisor should be prepared to offer you some level of support to help you get back on track. Here are some common things you can expect:

• Temporary royalty relief
• Additional marketing support
• Operational audits to help pinpoint the issues

Consider Selling Your Franchise

If your heart’s no longer in it or you just don’t see a path forward to a profitable unit, reselling the franchise might be your smartest move. Most franchise agreements allow you to sell your location, but you’ll need the franchisor’s approval, and the buyer will have to meet their requirements. 

This is extremely common in the franchise world. FRANdata’s 2023 State of Franchising report found that transfers accounted for roughly 17% of all unit activity in 2022.

Don’t worry about that niggling feeling that you’re just passing the problem to someone else, either. New operators can often bring more capital and a fresh perspective that can turn things around.

However, before you go looking for a buyer, take a close look at your franchise agreement for resale conditions and be sure to have a conversation with your franchisor about your intentions. They might even have an existing pipeline of willing buyers.

Negotiate a Buyback with the Franchisor

Some franchisors will buy back locations, especially if they see long-term value in the local market but think the current setup is struggling. In fact, franchise agreements often include buyback provisions that lay out specific terms for the franchisee to sell the franchise back to the parent company.

Franchisors might take over the lease and assets under corporate management before re-opening the unit or reselling it to another franchisee later. Sometimes, they’ll close the unit entirely but take it off your hands just to protect the brand. Don’t expect to make a big profit here. Buybacks are more about walking away with reduced financial exposure and fewer legal headaches than anything else.

Closing Down the Franchise Location

Sometimes, the best option is also the hardest one. If the numbers aren’t working or you’re mentally and financially tapped out, and you aren’t able to negotiate a sale, closing your doors might be the cleanest way to stop the bleeding.

How you go about closing your doors depends on your franchise agreement and where you are in your contract. For example, if you can keep your head above water long enough to manage all financial obligations and simply not renew, this might be the cleanest exit. This is because, if you’re still mid-contract, there will likely be more financial penalties or damages for terminating the agreement early.

Either way, closing down will likely require:

• Written notification to the franchisor
• Following predefined debranding steps (removing signage, returning proprietary materials, etc.)
• Settling up on any unpaid royalties or fees

If you signed a personal guarantee, just note that closing doesn’t necessarily wipe out your debt. So, consult a lawyer or franchise expert before making any final moves.

Franchisors aren’t the only ones you notify, either. You’ll also want to talk to your landlord, as well as your vendors.

Legal and Financial Consequences of Franchise Failure

Unfortunately, it’s not as simple as switching everything off and handing over the keys to the unit. Franchise agreements are legally binding contracts, and there are quite a few legal and financial consequences that can occur if you fail.

Unpaid Royalties and Fees Don’t Just Disappear

If your failure leads to your franchise ultimately shitting down, you might still be on the hook for royalties or other expenses up until the end of your franchise agreement. The franchisor is especially likely to pursue any outstanding payments that had accrued before you decided to walk away.

You May Owe Liquidated Damages

Liquidated damages are a common part of early termination clauses in franchise agreements. This means that if you (or the franchisor) terminate early, you may have to pay a portion of the royalties they would have received had you fulfilled the full term of the agreement. All states, apart from Minnesota and North Dakota, allow liquidated damages clauses in franchise agreements.

Personal Guarantees Can Haunt You

If you used a personal guarantee to secure the franchise agreement itself or anything related, such as your lease or other business loans, you will still be on the hook even if the business fails. In other words, creditors can come after your personal assets to repay the loan, including savings, your home, or your car.

Limit the Legal Fallout with a Franchise Attorney

I highly recommend seeking qualified legal advice. Look for an attorney with specific franchise experience rather than a general business or contract lawyer. Franchise attorneys will understand the nuances in the industry. They will help you understand what you actually owe and what you can negotiate according to your rights and the agreement you signed. Working with an experienced franchise attorney can be the difference between negotiating a settlement and closing the franchise saddled with debt.

Lessons From Real-Life Franchise Failures

Here are a few examples that will help you spot failure warnings at the HQ level.

Quiznos: Hyper-Growth + Squeezed Franchisees = Meltdown

Quiznos’ growth skyrocketed past 4,500 units in the mid-2000s before quickly imploding. Franchisees said the company forced them to buy ingredients at inflated prices while advertising $2 subs. The result was margins being wiped out for franchisees. It ended in multiple class-action lawsuits and settlements involving nine-figure sums.

BurgerIM: “Business-in-a-Box” Hype, Zero Follow-Through

BurgerIM pitched an easy, turnkey concept and sold thousands of licenses as a result. However, the brand then failed to open most locations or support the ones that did. They were eventually hit with a $49 million default judgment in federal court in 2024.

Curves: One-Format Wonder That Didn’t Evolve

Curves was another franchise that rose to prominence quickly, earning huge brand recognition. The women’s fitness clubs topped out at around 7,000 clubs by the early 2000s. After some initial success, franchise locations were quickly getting undercut by boutique studios and major 24/7 gyms. Curves lacked the infrastructure to remain competitive.

Turning a Setback Into Your Next Step

If your franchise location is failing, it doesn’t necessarily mean you are at the end of your franchise journey. 

At Franzy, we’re here to guide you through the hard moments of franchising, not just the highlight reel. So if you are planning your next move or figuring out how to pivot after a tough stretch, you can rely on our helpful tools and expertise to help you move forward.