Buying a franchise: check the termination terms

When joining a franchise network, it is easy to focus on opening your business and attracting your first customers. It is just as important to understand how the relationship can be ended before the contract term expires. Poor sales, illness or failures by the franchisor do not necessarily release you from the agreement. Before committing, check the termination terms and calculate what an orderly exit would actually cost.

1. Distinguish between termination on notice, immediate termination and expiry

Termination on notice generally ends the agreement after a notice period. Immediate termination usually means ending the agreement with immediate effect, for example because of a material breach of contract. A fixed-term agreement, meanwhile, normally ends when the agreed term expires, unless otherwise agreed regarding its continuation.

A fixed-term business-to-business agreement cannot generally be terminated on notice during its term simply because the business has not met expectations. If you need an early exit option, you must negotiate it explicitly. A notice period stated in the agreement does not, on its own, tell you when termination on notice is permitted.

Identify the following separately in the draft agreement:

• the start and end dates of the contract term
• any automatic renewal and the notice deadline for preventing it
• each party’s right to terminate on notice during the term
• the events that justify immediate termination
• the required form, recipient and delivery method for notices.

Ask the franchisor to explain in writing how these terms would apply to your business. A verbal assurance that an exit can always be agreed does not guarantee a right to terminate.

2. Understand the protection offered by Finnish law

Finland has no specific franchising act, statutory franchise agreement registration system or separate, prescribed pre-contractual disclosure procedure for franchises. This does not mean that contract terms or negotiations are unregulated.

Agreements are governed by legislation including the Finnish Contracts Act, as well as general principles of contract law. Section 36 of the Contracts Act allows an unreasonable contract term to be adjusted or set aside. However, this is assessed case by case: buyers should not base their exit plans on the assumption that an unfavourable term will later be adjusted.

The Finnish Unfair Business Practices Act prohibits conduct contrary to good business practice and false or misleading representations covered by the Act. The Finnish Competition Act and EU competition rules may, in turn, affect the assessment of matters such as post-contractual non-compete restrictions. The contractual duty of loyalty also requires parties to take account of each other’s legitimate interests.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not law. Association members commit to following it. Check separately whether the franchisor is a member and whether the agreement refers to the Code. A franchise network’s ethical commitments are no substitute for clear termination terms.

3. Insist on clearly defined breaches and an opportunity to remedy them

The risk in a termination clause often lies in vague wording. If the franchisor can terminate immediately for a breach of any instruction, even a minor error can create significant uncertainty. Ask for a clear distinction between shortcomings that can be remedied and breaches serious enough to justify immediate termination.

For failures that can be remedied, negotiate a procedure under which the party concerned receives written notice, a precise description of the problem and a reasonable period to put it right. Late payment, a reporting error and a serious threat to customer safety are different situations and should not all be covered by a single blanket clause.

Also check when repeated breaches justify termination. Does a shortcoming remedied years ago still count? Can the same minor error lead to immediate termination without a further warning? These boundaries should be clear when you sign the agreement.

The terms should also address breaches by the franchisor. What can the franchisee do if the franchisor fails to fulfil a material obligation and does not put matters right despite receiving notice? Ask a lawyer to assess whether the franchisee’s remedies are workable in practice. Do not stop making payments unilaterally without first establishing the consequences.

4. Negotiate an exit route for changes in personal circumstances

Not every exit results from a breach of contract. Long-term illness, incapacity for work or another serious change in personal circumstances may make running the business impossible, even if the business has met its obligations properly. Such a change does not automatically end the business’s agreement.

Find out whether a separate right to terminate can be included for precisely defined circumstances. At the same time, agree on the evidence required, the notice period and how the business will be managed during the transition. This is particularly important if the agreement requires a named individual to work personally in the business.

You can also try to negotiate an exit procedure for prolonged losses. However, the franchisor does not have to accept such a clause. If early departure is possible only by mutual agreement, treat it as an opportunity to negotiate, not a guaranteed right.

5. Calculate the cost of termination before signing

The end of the agreement does not necessarily mean that payments or other liabilities end on the same day. Establish what happens to outstanding payments, advance payments, contractual penalties and any claims for damages. In particular, check whether compensation for early departure is calculated by reference to the remaining contract term, and how that calculation works.

Prepare a separate closure budget. This may include removing branding, altering the premises, dealing with stock, shutting down systems and meeting obligations relating to staff and other contracts. Do not assume that the franchisor will buy back equipment or unsold products unless this has been agreed.

Also ask for a written exit checklist: who will handle unfinished customer work, complaints, the return of materials and the lawful handling of customer data? Ending the agreement does not, in itself, remove obligations towards customers.

Practical checklist: Do not sign until you know on what grounds you can leave, how long the exit will take and which costs you will bear. Have any unclear termination terms reviewed by an independent lawyer.