Terminating a franchise agreement: assess the cost of leaving before you buy

Joining a franchise network also means assessing how you could leave it. A business may no longer make sense because of personal changes, commercial difficulties or contractual disputes. Before you buy, understanding the exit rules helps you assess the full risk of the commitment — which extends beyond the initial investment.

1. Identify how the agreement can end

Do not treat every way of ending the agreement as equivalent. It may expire at the end of its term, end early by mutual agreement or be terminated because one party has breached it. An exit initiated by the franchisee, where the franchisor has committed no breach, may be treated differently from termination prompted by contractual failings.

Draw up a table covering each scenario and record:

• Who can initiate termination and under what conditions.
• What notice is required and how it must be delivered.
• Whether there is a period in which a breach can be remedied before termination.
• Which penalties, compensation payments and obligations remain applicable.
• When use of the brand and access to systems must cease.

Look for vague expressions, such as “failure to meet standards”, and ask for specific examples. When assessing the agreement, a prospective franchisee should distinguish between a failure that can be remedied and a breach that permits immediate termination.

Also check whether expiry at the end of the agreed term requires notice of non-renewal. Do not assume that handing back the keys or stopping trading ends the franchise agreement. Without a formal process, disputes may arise over subsequent charges and breaches.

2. Check what the law requires to be disclosed

In Brazil, contractual relationships within franchise networks are governed by Law No. 13,966/2019, which replaced Law No. 8,955/1994. The legislation requires a franchise disclosure document, known as the Circular de Oferta de Franquia (COF), written in Portuguese in clear, accessible language.

When assessing an exit, particularly relevant disclosures include penalties, contractual fines and compensation payments, including their amounts; the franchisee’s position after the agreement ends regarding acquired know-how and competing activities; and the rules on transfer, succession, duration and renewal. The COF must include a copy of the standard agreement and, where applicable, the preliminary agreement, together with their annexes.

The document must be provided at least ten days before the agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. Use this interval to compare the sales explanation with the actual contractual clauses.

The law does not create a general right to withdraw without cost because the outlet has performed below expectations. It also provides that a franchise relationship is not a consumer relationship. This does not remove the franchisee’s contractual rights or the legal consequences of failures to make mandatory disclosures.

Omissions or false information in the COF may provide grounds for remedies under the law itself. However, do not confuse a potential legal challenge with permission to abandon the outlet: seek specialist advice before acting.

3. Calculate the financial exposure on exit

The termination penalty often attracts the most attention, but it may represent only part of the total outlay. Ask for written cost estimates for exits at different stages of the agreement, without assuming that projected turnover will be achieved.

Divide the calculation into four groups:

• Contractual amounts: the exit penalty, overdue instalments and other charges specified in the agreement, checking whether they can be charged together.
• Decommissioning: removing external signage and branding from the premises, returning equipment and cancelling systems.
• Third-party obligations: employee termination payments, taxes, commitments to suppliers and the costs of closing the company.
• Asset recovery: the likely resale value of equipment and stock, allowing for costs and restrictions.

Do not treat the purchase price of equipment as a guaranteed resale value. Nor should you assume that the franchisor will buy back products: any such obligation needs a contractual basis, with criteria covering price, condition and timing.

If the penalty depends on the remaining months or average turnover, check the formula and the period used. Ask your lawyer to examine its proportionality and any potential double counting. Brazil’s Civil Code provides for an equitable reduction of contractual penalties in certain circumstances, such as partial performance of an obligation or a manifestly excessive amount. This does not mean an automatic discount: negotiating clear limits before signing is safer than relying on a future dispute.

4. Examine what continues after you leave

Termination may leave you with confidentiality obligations, requirements to return manuals and remove branding, and restrictions on competition. Read each provision with your ability to continue working and earning an income in mind.

For any non-compete clause, identify its duration, geographical scope, the activities it covers and the people subject to the restriction. Wording that prevents you from undertaking any professional activity deserves careful scrutiny. The validity and scope of these provisions depend on the context and applicable legal limits; do not accept the claim that every restriction is necessarily valid.

Also check whether personal guarantees remain in force after termination and how guarantors are released. Any exit agreement should clearly state the amounts payable, due dates, outstanding obligations and the scope of any release from liability.

Practical conclusion: before you buy, prepare a one-page summary answering three questions: how much will it cost to leave, how long will it take, and what will you be able to do afterwards? If the documents do not provide answers, seek clarification and negotiate before committing.