Exiting a franchise: what to assess before you buy

Buying a franchise also means understanding how to leave it. A well-structured franchise relationship should make clear not only how the business will open and operate, but also how it can end. Reviewing the exit process before investing helps you identify costs, negotiate responsibilities and protect your assets if the business needs to close sooner than expected.

1. Identify the different ways the relationship can end

Start by distinguishing between situations that are often discussed together during sales conversations but may have different consequences under the agreement:

• Expiry: the agreement reaches its end date without being renewed or extended.
• Early exit initiated by the franchisee: you want to end the relationship before the agreement expires, even without alleging a breach by the franchisor.
• Termination for breach of contract: one party alleges that the other has failed to meet its obligations in a way that would justify termination.
• Termination by mutual agreement: the franchisee and franchisor negotiate an agreement to end the relationship.

For each scenario, check the required procedure, notice period and any obligations that survive termination. Also check whether there is a period in which a breach can be remedied before termination, and which breaches allow immediate termination.

Do not confuse poor profitability with an automatic right to leave without paying any costs. Disappointing commercial results alone do not necessarily mean that the franchisor has breached the agreement. The assessment depends on the obligations undertaken, the information provided and the specific circumstances.

Key question: if you need to close the outlet for personal or financial reasons, what route does the agreement provide?

2. Check what the law requires and what the agreement needs to cover

In Brazil, the specific legislation is Law No. 13,966/2019, known as the Franchise Law, which repealed Law No. 8,955/1994. It requires the provision of a franchise disclosure document, the Circular de Oferta de Franquia (COF), containing clear, accessible information in Portuguese.

The mandatory disclosures include the standard form of agreement, the circumstances in which penalties, fines or compensation apply, and the amounts involved. The COF must also explain the franchisee’s position after the agreement ends regarding the know-how received and the establishment of a competing business.

This information allows you to assess your exit options before buying. Compare the COF, its annexes and the draft agreement: a significant obligation should not appear for the first time in the version presented for signature.

As a general rule, the COF must be delivered at least ten days before a contract or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. This is a minimum interval, not a deadline for making your decision.

The law remains relevant after signing. The agreement must be interpreted in accordance with the applicable rules, including Brazil’s Civil Code. Obtain independent legal advice on the termination provisions, and do not assume that every clause is valid simply because it is written into the agreement.

3. Calculate exit costs beyond the contractual penalty

An early termination penalty may be only one part of the bill. Prepare a spreadsheet showing the commitments you would need to settle if the outlet closed at different points during the contract term.

Include, where applicable:

• any penalty or compensation payable in the relevant exit scenario;
• overdue payments and other obligations that remain enforceable;
• employment-related costs arising from closure;
• ending the lease and handing back the premises;
• removing branding and altering the shopfront;
• cancelling services and third-party contracts;
• transporting, storing or disposing of assets and stock.

Do not automatically add every charge together: ask your lawyer to check whether they can be charged cumulatively, what triggers them and how they are calculated. Ask your accountant to estimate the costs of closing the company or outlet.

Nor should you treat stock and equipment as readily available cash. Do not assume that the franchisor is obliged to buy them back unless there is a specific contractual or legal basis for doing so. If a buy-back provision exists, examine the pricing criteria, condition requirements, eligible items and payment deadline.

4. Insist on a workable exit procedure

An agreement may set out costs in detail yet still make the exit process impractical. Confirm who must receive notice, how it must be sent and when the notice periods begin to run.

Ask for clarification on outstanding orders, customer service, product warranties, disabling system access and returning materials. Ending the franchise relationship does not automatically remove obligations towards customers, employees, suppliers or the landlord.

Also check how you can obtain tax documents and any necessary records before system access is blocked. Personal data must be retained and processed in accordance with applicable legislation, even after the relationship ends.

If you negotiate a termination agreement, check whether any release from liabilities is mutual, which debts it covers and which obligations remain in force. Do not accept a generic statement that the relationship has ended as a substitute for these checks.

Practical takeaway: before buying, prepare a one-page summary of the exit scenarios, deadlines, costs and continuing obligations. If any of these points rests solely on a verbal promise, clarify it and put it in writing before committing.