Franchise preliminary agreements: what to assess before signing

A franchise preliminary agreement may seem like little more than a way to reserve an opportunity, but signing it can create significant commitments even before you have chosen your business premises. To enter the Brazilian franchise market with confidence, prospective franchisees need to understand what they are promising, which conditions still need to be met and what happens if the project does not proceed. The document’s title alone does not determine its legal effect.

1. Understand the commitment you are making

In Brazil, Law No. 13,966/2019 governs business franchising and expressly refers to preliminary agreements. This does not mean that every franchise arrangement must go through this stage. Where used, the agreement should have a clear purpose: to organise the set-up process, establish conditions for entering into the final agreement or formalise other commitments specified in the text.

The law requires the Franchise Disclosure Document, known in Brazil as the Circular de Oferta de Franquia (COF), to include the standard franchise agreement and, where applicable, the standard preliminary agreement, with their full wording and all annexes. It also requires the COF to be provided at least ten days before the franchise agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it.

This is a minimum period for assessing the offer, not a deadline for making your decision. Do not accept the argument that signing early would be harmless because the document is “just a reservation”.

Alongside the Franchise Law, the Brazilian Civil Code’s rules on preliminary contracts may be relevant. Depending on its wording and the agreed conditions, the document may provide grounds for requiring you to enter into the final agreement. Ask your lawyer to establish whether it creates an obligation to proceed, allows you to withdraw or merely sets out preparatory commitments.

2. Turn outstanding issues into verifiable conditions

Before signing, list everything that still needs to happen for the outlet to become viable. The franchisor’s approval of your application does not, in itself, resolve matters such as the availability of premises, licensing or funding for the set-up.

Consider recording conditions such as:

• written approval of the premises on technical and commercial grounds;
• confirmation that the intended business activity is permitted at the chosen address;
• securing finance, where this is essential to the project;
• completion of the legal review of the documents;
• approval of the set-up budget within an agreed limit.

Simply writing “subject to approval” is not enough. Each condition needs to specify who makes the decision, which documents are required, what the deadline is and what happens if the condition is not met.

For example, if the intended activity cannot be carried out at the premises, will you have time to find another location? Will the agreement end without penalty? Will any costs be non-recoverable? These answers should be set out in the agreement rather than left for a later conversation.

Also distinguish between an external condition, such as a bank’s lending decision, and an obligation on your part, such as submitting documents. This distinction helps prevent every difficulty from automatically being treated as a breach.

3. Organise deadlines, costs and responsibilities

The preliminary agreement should allow you to track the project without creating obligations that are impossible to meet. Set out a simple sequence: submission of documents, assessment of the premises, budgeting, approvals and signing the final agreement. Check whether each stage depends on another being completed first.

Avoid accepting a fixed opening date while essential decisions remain outstanding. If the franchisor is late in assessing the premises or providing specifications, the agreement should explain how your deadlines will be adjusted.

Prepare a tracking table with four details for each stage: the responsible party, the deadline, evidence of completion and the consequences of delay. Also include expenditure authorised during this period, such as design work, inspections and technical services.

Do not assume that preparatory expenses will be reimbursed. Check who commissions each service, who pays and who will be entitled to use the resulting material if the outlet does not open. Avoid committing to purchases or service contracts that cannot be cancelled before the essential conditions have been resolved.

4. Check the transition to the final agreement

Compare the preliminary agreement with the draft final agreement provided in the COF. The outlet format, contracting parties, obligations and commercial terms need to be consistent. If you initially sign as an individual but the final agreement will be signed by a company yet to be incorporated, clarify how that transition will work and which personal liabilities will remain.

Also check whether the preparatory period will count towards the term during which you are entitled to operate the franchise. Depending on the contractual wording, months spent setting up may reduce the time available to run the business.

Keep dated versions, annexes and approvals. Any material change should be formally documented and reviewed before the next agreement is signed.

In practice: only sign when you can explain, based on the document, what needs to happen for the project to proceed, how much you may spend at this stage and what the consequences will be if the conditions are not met.