Preliminary franchise agreements: when to use them and what to include

When turning an existing business into a franchise, there may be a gap between approving a prospective franchisee and signing the final agreement. Premises may still be under review, the prospective franchisee may not yet have incorporated their company, or other conditions may remain outstanding. A preliminary agreement can help manage this stage, but it also creates obligations. In franchising, its purpose should be to clarify the relationship, not to bring forward a sale without the necessary safeguards.

1. Decide whether there is a genuine need

A preliminary agreement is not a mandatory step for every franchise. Its usefulness depends on whether there is a specific issue to resolve before the final agreement, with responsibilities that need to be documented.

One possible scenario is the approval of a prospective franchisee who still needs to find premises suited to the business model. Another is the need to incorporate the company that will run the operation. In these cases, the agreement can establish who will carry out each task, which criteria will apply and when this stage must be completed.

Before using one, answer these questions:

• What outstanding issue prevents the final agreement from being signed?
• What must each party do to resolve it?
• What costs might arise during this period?
• What will happen if the condition is not met?

If there are no clear answers, a preliminary agreement may simply add complexity. Where all conditions have already been met, seek legal advice on whether it would be more appropriate to proceed directly to the franchise agreement, while complying with mandatory pre-contractual disclosure requirements.

The document’s name does not remove its legal effects. A ‘franchise reservation agreement’ or ‘letter of intent’ may contain significant commitments. Any review should focus on the obligations undertaken, not just the chosen title.

2. Comply with COF requirements before signing or collecting payment

In Brazil, Law No. 13,966/2019, known as the Franchise Law, regulates business franchising and repealed Law No. 8,955/1994.

Article 2, paragraph 1, requires the franchise disclosure document, known as the Circular de Oferta de Franquia (COF), to be delivered to the prospective franchisee at least ten days before the franchise agreement or preliminary agreement is signed, or before any type of fee is paid to the franchisor or to a company or person connected with it. A specific rule applies to tendering or pre-qualification procedures conducted by a public body or entity.

A preliminary agreement therefore does not allow the review period to be bypassed. Nor is it safe to describe a charge as a simple ‘reservation fee’ in order to collect it before delivering the COF and observing the required waiting period.

The law also requires the COF to include the standard franchise agreement and, where applicable, the standard preliminary agreement, with their full wording and all annexes. Prospective franchisees must have advance access to the document they will be asked to sign.

Keep records of the version supplied, the recipient’s identity, proof of delivery and the planned dates for signing and collecting payment. If there is a material change to the terms, seek legal review before proceeding, including advice on whether the document must be delivered again and a new review period observed.

3. Turn outstanding issues into verifiable conditions

A useful preliminary agreement sets out verifiable outcomes rather than relying on vague expressions such as ‘satisfactory approval’ or ‘necessary steps’.

If the outstanding issue concerns premises, specify the applicable criteria, the documents required, who grants approval and how the decision will be communicated. If it concerns company incorporation, clarify which documents must be provided and how obligations will be transferred to the company, where applicable.

Also define:

• Deadline for compliance: the final date and the procedure for any extension.
• Duties to co-operate: the information and assessments each party must provide.
• Limits of authorisation: which activities may begin and which depend on the final agreement.
• Termination: the consequences of withdrawal, refusal of approval or inability to meet a condition.

Do not confuse preliminary approval with authorisation to operate. Prospective franchisees need to know whether they may advertise the future outlet, use branded materials or enter into commitments with third parties.

As a precaution, avoid encouraging irreversible expenditure while essential conditions remain outstanding. If any early commitments are necessary, make the risks and responsibility for them clear.

4. Clarify payments and exit arrangements

If a payment is required at this stage, once the statutory waiting period has been observed, specify its amount, purpose, due date and how it will be treated when the final agreement is signed. Make clear whether it will be deducted from the franchise fee or pays for a specific deliverable.

Do not group different situations under a single clause providing for forfeiture of the entire payment. Voluntary withdrawal by the prospective franchisee, rejection by the franchisor and failure to secure approved premises may call for different solutions. Any amounts retained, penalties and refunds should be legally assessed, taking into account their justification and proportionality.

For example, if no suitable premises are found within the deadline, the document should set out the next step: a formal extension, termination or another expressly agreed solution. This reduces ad hoc decisions and unexpected charges.

In practice: use a preliminary agreement only to manage a necessary transition. Before offering one, ensure its content is consistent with the COF, confirm the statutory waiting period and document the conditions, responsibilities and financial consequences.