Buying a franchise: how to agree exit terms in Argentina

Before joining a franchise network, you need to understand how you could leave it. Illness, relocation or a change in priorities may force you to sell or close, even if the business is doing well. Reviewing these possibilities before signing allows you to identify restrictions, negotiate procedures and avoid commitments that continue to generate costs after you have stopped trading.

1. Distinguish between expiry, early termination and sale

In Argentina, franchise agreements are specifically governed by Articles 1512 to 1524 of the national Civil and Commercial Code. Simply reading a clause headed ‘termination’ is not enough: the agreement must be interpreted as a whole, alongside those provisions.

Article 1516 sets a general minimum term of four years by reference to Article 1506, with exceptions for special circumstances, such as trade fairs, conferences or activities of limited duration. You should therefore not assume that you can leave an ongoing franchise at any time simply by giving notice.

Distinguish between three scenarios:

• Expiry and non-renewal: you want to leave at the end of the applicable term.
• Early termination: you want to end the agreement sooner, because of a material breach or by agreement with the franchisor.
• Transfer or sale: you want someone else to take over the business, subject to the necessary approvals.

Article 1522 provides that the agreement cannot be terminated without just cause during its original term. Low profitability does not automatically constitute just cause or, on its own, entitle you to leave without consequences.

Seek a legal review of each scenario, not just the penalties. This should also cover the breaches that allow termination and the procedure for documenting them.

2. Check the renewal and notice timetable

An expiry date written into the agreement does not necessarily mean that the relationship will end automatically. Article 1516 provides for tacit one-year renewals and states that, on the second renewal, the agreement becomes open-ended.

To prevent renewal, that article provides for express notice to be given thirty days in advance. Meanwhile, Article 1522 requires notice of one month for each year of the agreement’s duration, up to a maximum of six months, to end it on expiry of the original term or any renewal. Do not assume that thirty days’ notice alone is sufficient: both provisions need to be considered together in your particular case.

Failure to give notice may give rise to a compensation payment. Open-ended agreements are also subject to specific rules on when termination can take effect.

Before signing, clearly identify:

• The start date and the event that determines it: signing, handover of the premises or opening for business.
• The expiry date and renewal conditions.
• The address and valid method for serving notice.
• The person responsible for recording notices and keeping proof of receipt.

Schedule a review well ahead of the longest applicable notice period. An informal message to the sales manager may not count as contractual notice.

3. Agree how you could transfer the business

Unless otherwise agreed, Article 1518 provides that franchisees cannot transfer their position under the agreement or the rights arising from it while it remains in force, except for monetary rights. As a result, selling equipment or finding a buyer does not automatically transfer the franchise.

If your plans include selling in the future, negotiate a written procedure at the outset. It should clarify the requirements the buyer will have to meet, the documents you will need to submit and how approval or rejection will be communicated.

Also ask whether there will be transfer fees, who will pay them and whether the buyer will take over the existing agreement or have to sign a new one. Do not confuse these alternatives: they may change the term, the obligations and the attractiveness of the deal.

Another crucial issue is your release from liability. Approval for a third party to take over should not, without further review, be treated as cancelling earlier debts or personal guarantees. Ask for any agreed release to be expressly documented, including how guarantors will be treated.

4. Budget for obligations that continue after exit

Leaving may mean you still have outstanding commitments outside the franchise agreement: rent, staff, equipment finance, taxes and utilities. Each relationship needs its own assessment; ending the franchise does not automatically end these obligations.

Request a closure procedure setting out how to remove signage, stop using the brand, return confidential materials and disable access. Also check what happens to warranties given to customers and outstanding claims.

Confidentiality obligations may continue after termination. As regards post-termination non-compete restrictions, Article 1522 permits a clause lasting up to one year and covering a territory that is reasonable in the circumstances. Any broader restriction warrants a specific legal review.

Practical conclusion: before buying, work with your lawyer to draw up an exit checklist covering dates, approvals, costs and continuing obligations. If you cannot explain how you would leave the business, an essential part of the investment still needs reviewing.