Franchise insolvency can be particularly complex due to the contractual obligations involved. If your franchise company becomes insolvent and you choose to enter voluntary liquidation, the franchise agreement is typically brought to an end as part of the process. In this situation, the franchisor will usually be listed as an unsecured creditor in the liquidation, meaning they may only receive a small portion—or none—of the money they’re owed.
In some cases, you may wish to exit the franchise agreement before reaching the point of insolvency. However, doing so is often difficult, as most agreements are drafted in favour of the franchisor and offer limited options for early termination unless there’s a significant breach of contract on their part.
Whether you’re navigating financial distress or simply re-evaluating your options, it’s essential to understand your legal standing. Business Insolvency Helpline can offer expert advice on both franchise insolvency and contract termination, helping you take the right steps for your situation.
Franchisee Liquidation and Exiting a Franchise Agreement
If you are a franchisee facing insolvency and opt to voluntarily liquidate your company, the franchise agreement will typically be terminated as part of the process. In such cases, the franchisor is likely to be treated as an unsecured creditor in the liquidation, which may impact any outstanding financial obligations you owe under the agreement.
Alternatively, if you wish to exit the franchise arrangement before reaching the point of insolvency, you may be able to do so, although your options will depend on the specific terms of the franchise agreement. Early termination clauses, notice periods, fees, and other contractual obligations may apply, and it is advisable to seek professional legal and financial advice before taking any action.
How to liquidate a company when in a franchise agreement
Liquidating a company that is bound by a franchise agreement can be a complicated process. It is important to first review the franchise agreement and determine what obligations must be fulfilled before proceeding with liquidation. The franchisor may require certain notifications and approvals before liquidation can take place.
Additionally, any franchise agreements and obligations must be terminated and settled in accordance with the terms of the agreement. The franchisee must also notify its customers, employees, and other stakeholders of the liquidation and any impact it may have on their relationships.
Closing a limited company that is franchised
For franchisees under financial pressure, the thought of liquidating your business can be daunting — not just emotionally, but legally and financially too. If your company becomes insolvent and you proceed with voluntary liquidation, the franchise agreement will typically be terminated. In this scenario, the franchisor is usually listed as an unsecured creditor in the liquidation, meaning they may still pursue outstanding sums owed under the agreement, despite your financial hardship.
Many franchisees feel trapped — unable to keep the business afloat but unsure how to walk away. Exiting a franchise before reaching insolvency is an option, but it’s rarely straightforward. Franchise agreements often contain strict termination clauses, early exit penalties, and ongoing liabilities that can make leaving costly or complex.
Franchises we can help with
No matter which franchise you operate, facing closure or termination — whether due to insolvency or shifting trading conditions — can be overwhelming. We’re here to provide clear, practical guidance to help you understand your options and make informed decisions during this challenging time.
We’ve supported franchisees from a wide range of sectors and brand names, including:
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Subway
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Costa Coffee
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McDonald’s
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Premier Education
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Papa John’s
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DPD
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Snap-on Tools
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Southern Fried Chicken
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Domino’s
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One Stop Stores
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Kumon Tuition
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Burger King
Whatever stage you’re at, we’ll help you take the next step with confidence — whether that’s navigating a structured closure, exiting your agreement, or understanding your legal position.
Franchise Agreements and Insolvency: The Impact of Onerous Contracts
Under the Insolvency Act 1986, a liquidator has the authority to terminate so-called onerous contracts — agreements that impose a financial burden on an insolvent company and hinder the winding-up process. This legal mechanism is designed to maximise returns for the company’s creditors as a whole.
Franchise agreements often fall into this category. They typically involve ongoing payments for the right to trade under the franchisor’s brand and use their intellectual property. If the appointed liquidator deems the agreement financially unviable, they may choose to disclaim it altogether.
In this scenario, the franchisor becomes an unsecured creditor for any unpaid fees or charges. Unfortunately, unsecured creditors sit at the bottom of the repayment hierarchy — meaning the franchisor may receive little or no financial return from the liquidation process.
This legal reality underscores the importance of early action, not just for franchisees facing insolvency, but also for franchisors seeking to protect their commercial interests.
Franchisor Liability for Rent Arrears: A Hidden Risk
Franchisors can face unexpected financial exposure when a franchisee business collapses — particularly in relation to leased premises. In many franchise structures, the franchisor holds the head lease on the property and sublets the premises to the franchisee company.
If the franchisee becomes insolvent and falls behind on rent, the franchisor — as head tenant — is usually liable for those arrears. This responsibility can come as a shock, especially if the franchisor had little or no warning of the franchisee’s financial difficulties.
Suddenly being left to cover unpaid rent, alongside the fallout of a terminated franchise agreement, can put additional strain on the franchisor’s own operations — potentially turning one business failure into a wider commercial risk.
When the Franchisor Fails: The Ripple Effect on Franchisees
While much attention is given to franchisee insolvency, the collapse of a franchisor can be equally — if not more — disruptive. When the franchisor enters liquidation, it sends shockwaves through the entire network, often leaving franchisees uncertain about their future.
As part of the liquidation process, the appointed liquidator will identify and take control of all company assets. This includes valuable intellectual property — such as trademarks, patents, and branding — which often underpin the entire franchise model. These assets are considered central to the business and must be sold to repay creditors.
For franchisees, this creates a precarious situation. The brand and systems they’ve built their business around may suddenly be up for sale, and continuity becomes far from guaranteed. In some cases, franchisees may have the opportunity to purchase the intellectual property themselves and continue trading independently — but this is not always possible, and timing is critical.
The insolvency of a franchisor is more than a legal event — it can pull the rug out from under an entire franchise network, forcing partners to act quickly to protect their livelihoods.
Getting Out of a Franchise Agreement: What Are Your Options?
Franchise agreements are typically weighted in favour of the franchisor, and for franchisees looking to exit early, the options can be frustratingly limited.
In most cases, a franchisee can only terminate the agreement if the franchisor has seriously breached its obligations. This could include failures that prevent the franchisee from operating the business effectively — such as not providing essential training, support, or access to core systems.
One clear example might be the franchisor’s failure to supply key equipment or grant access to required technology platforms — both of which could amount to a repudiatory breach, giving the franchisee legal grounds to walk away.
That said, successfully ending a franchise agreement on these grounds can be complex and often requires legal input. If you’re feeling trapped in a franchise that’s no longer working, it’s important to understand your rights and the potential risks of making a move without proper advice.
When Can a Franchisor End a Franchise Agreement?
Franchisors don’t take ending a franchise agreement lightly — but most agreements are designed to give them a way out when something goes seriously wrong.
Typically, the contract includes clauses that allow the franchisor to step in and terminate the agreement if a franchisee becomes insolvent or commits a serious breach — such as failing to follow the business model, damaging the brand, or neglecting key obligations.
That said, it’s not always immediate or final. In many cases, the franchisor will first give the franchisee a chance to put things right. If the issue isn’t resolved within a set timeframe, only then will the franchisor move to terminate the agreement.
It’s about balancing the need to protect the wider brand with fairness — giving franchisees a reasonable opportunity to get back on track, but also ensuring the business isn’t put at risk by ongoing non-compliance.
If you are a franchise and need insolvency advice about your business simply contact us on 01246 912052 to speak to one of the team.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.