Franchise agreements: how to plan for renewal and exit

When turning a business into a franchise, it is natural to focus on opening the first outlets. But the agreement also needs to work when the partnership changes or ends. In franchising, clear rules on renewal, transfer and exit help maintain continuity of service and reduce disputes. These decisions should be made before offering the franchise, not when the first franchisee leaves.

1. Set the term and renewal rules around operational needs

The contract term should reflect the investment required, the time needed to set up the outlet and the commitments associated with the business premises. This does not mean guaranteeing that the franchisee will recoup their investment within that term: projections carry risks and must be presented as estimates, never as promises of a return.

Before drafting the clauses, draw up a timeline covering the planned opening, the length of the lease, the useful life of key equipment and any potential refurbishment. An agreement that expires shortly after requiring a major upgrade can create a foreseeable dispute.

Also establish how renewal will be assessed. Practical decisions include:

• When the franchisee must express an interest in continuing.
• Which objective criteria will be considered, such as compliance with the agreement and timely payments.
• How any required changes to the outlet will be communicated.
• Which costs and conditions may apply on renewal.
• What will happen if the parties cannot reach an agreement.

Do not present renewal as automatic if it requires approval. Nor should essential criteria be hidden behind vague phrases such as “at the brand’s sole discretion”. Clear conditions allow both parties to plan for continuity.

2. Align the agreement, the franchise offering and Brazilian law

Brazil has specific legislation: Law No. 13,966/2019, the Franchise Law, which repealed Law No. 8,955/1994. It requires the franchise disclosure document, known locally as the Circular de Oferta de Franquia (COF), to state the contract term and renewal conditions, as well as any rules on transfer or succession.

The COF must also explain the franchisee’s position after the agreement ends in relation to their knowledge of confidential information and any competing business activity. It must set out the circumstances in which penalties, fines or compensation apply, together with the respective amounts, as established in the agreement.

The full standard agreement and, where applicable, the preliminary agreement, including annexes and conditions governing their validity, form part of the mandatory disclosures. It is therefore not enough to provide a brief commercial overview and leave the exit conditions for a later document.

The COF must be provided at least ten days before the agreement or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. Record delivery and keep track of the versions supplied.

For agreements that take effect exclusively within Brazil, the law requires them to be written in Portuguese and governed by Brazilian law. Seek specialist legal review to ensure the documents are consistent and to assess the validity of the proposed obligations. A written clause does not become valid simply because it has been signed.

3. Prepare for transfer and closure rather than improvising

A franchisee’s departure does not always require the outlet to close. Transferring it to another operator can preserve continuity of service, but there must be a defined procedure. Explain how the prospective operator will be assessed, which documents will be required, who will approve the transaction and how outstanding debts and obligations will be handled.

Distinguish between selling the outlet’s assets and transferring the franchisee’s contractual rights and obligations. Buying equipment or taking over the premises does not automatically authorise the buyer to use the brand and franchise system.

For closure, draw up a list of responsibilities covering:

• Removing branding and ending authorised use of the brand.
• Returning or otherwise dealing with confidential materials.
• Disabling access to systems and official communication channels.
• Calculating outstanding amounts and handling stock in accordance with the agreed rules.
• Notifying customers and making arrangements for outstanding orders, credits or unfinished services.

Customers’ and employees’ personal data must not be transferred or deleted indiscriminately. The procedure must comply with Brazil’s General Personal Data Protection Law, Law No. 13,709/2018, taking account of the applicable legal bases, responsibilities and retention duties.

4. Test the rules before offering the franchise

Run through three scenarios: a franchisee who wants to renew, another who wants to sell the outlet and a third who breaches their obligations. In each case, check who communicates the decision, through which channel, within what timeframe and with what consequences.

Distinguish between expiry at the end of the agreed term, termination by mutual agreement and termination for breach. Where appropriate, provide for notice and an opportunity to remedy the breach. Fines, restrictions on competition and compensation provisions require legal assessment for proportionality and validity; they should not operate as blanket punishments.

Practical action: before recruiting prospective franchisees, bring management and legal advisers together to turn these scenarios into clear procedures consistent with the COF and the agreement. Planning for exit is also part of looking after the partnership.