Buying a franchise: when can you walk away before signing?

When choosing a franchise, you may realise after several meetings that the concept is not right for you. You can usually turn down the offer, but saying “we haven’t signed anything, so we have nothing to worry about” may not stand up to scrutiny. In the Czech franchise sector, as in other business relationships, pre-contractual liability applies. What matters is how the negotiations have progressed, both parties’ expectations and why the partnership ultimately fails to materialise.

What rules apply before a contract is concluded?

The Czech Republic has no specific franchising legislation or statutory requirement to provide prospective franchisees with a standardised franchise disclosure document. This does not mean, however, that there are no rules before signing. A franchise agreement is generally an “innominate contract” — a contract not specifically defined by statute — under Section 1746(2) of Act No. 89/2012 Coll., the Czech Civil Code. Negotiations are governed in particular by Sections 1728 and 1729 of the same Act.

The basic principle is freedom to negotiate and ultimately decide not to enter into a contract. Problems arise, for example, if someone starts or continues negotiations without any genuine intention of concluding an agreement. Ending very advanced negotiations without a justifiable reason may also amount to bad faith if the other party reasonably expects the agreement to be signed.

Both parties must also disclose the factual and legal circumstances needed to assess whether a valid contract can be concluded and whether they wish to enter into it. This does not give either party an unrestricted right to all the franchisor’s internal documents. What matters is not concealing a decisive obstacle or creating a misleading impression of readiness to proceed.

Recognise how far negotiations have actually progressed

An initial presentation of the brand is usually very different from a situation where the key terms have been agreed, the location approved and all that remains is to arrange the signing. Neither the number of meetings nor the length of correspondence is decisive on its own. The overall context matters.

Before taking the next step, ask yourself four questions:

• Are any fundamental issues still unresolved, such as the duration of the relationship, the investment required or the scope of the licence?
• Have we made it clear that our decision depends on legal and financial due diligence?
• Has anyone stated in writing that everything has been approved and signing is merely a formality?
• Has the other party, with our knowledge, started commissioning specific work or services?

Be careful, too, not to confuse an unsigned document with the absence of a contract. Depending on the content of your correspondence, any requirements as to form and other circumstances, accepting an offer by email may also have legal effect. If you intend to be bound only once the final document has been signed, make this explicit and have a lawyer check the wording.

Even an express reservation of this kind does not, by itself, excuse negotiating in bad faith.

Agree rules on costs and decision-making in advance

The best protection is not a sweeping statement that you accept no liability, but a clear process. At the outset, confirm in writing which checks remain to be carried out, who will make the investment decision and when you expect a final decision. Set out genuine conditions rather than vague reservations introduced only when you want to walk away.

Deal separately with expenses incurred before signing. An architectural feasibility study, a location assessment or training preparation may be of value only to a particular outlet. Agree:

• who may commission the service and at whose expense;
• whether the budget requires prior written approval;
• who will bear the cost if no franchise agreement is concluded;
• whether you will receive the resulting documents and materials, and to what extent.

An obligation to pay for a specific service that has been commissioned is not the same as pre-contractual liability. It may exist independently, even if franchise negotiations end for a legitimate reason. Similarly, obligations under an existing non-disclosure agreement or another preliminary agreement may remain in force.

Keep a simple record of outstanding issues and circulate a summary after important meetings. If the franchisor’s notes describe something as approved when you are still assessing it, correct them without undue delay.

How to end negotiations and what may follow

If you discover a serious obstacle, do not prolong negotiations simply to avoid an uncomfortable conversation. Communicate your decision in writing, promptly and objectively. Explain the specific reason and how it relates to your discussions so far. This might be a significant risk uncovered during due diligence or a failure to agree on an essential term. Whether it constitutes a legally justifiable reason always depends on the circumstances; no list of examples provides an automatic defence.

At the same time, ask for any further preparations being carried out at your expense to stop, and settle any orders already approved. Retain draft agreements, emails, meeting notes and records of costs. Continue to protect the other party’s internal information as required by law and any agreements you have entered into.

If the franchisor seeks damages, simply saying “we were counting on you” is not enough. Relevant considerations include whether the conduct amounted to bad faith, whether a loss arose and whether there was a causal link. Nor does compensation automatically mean paying all future franchise fees. Have a lawyer review the claim, including the amount sought. The same rules may also protect you if the franchisor ends negotiations in bad faith.

Practical takeaway: Until you have made your decision, do not promise that signing is certain. Keep an up-to-date record of outstanding conditions, approve costs in advance and, if you decide to end negotiations, communicate that decision promptly, clearly and in a way you can prove.