Ending a franchise agreement: a guide for franchise founders

When you expand an established business into a franchise network, the end of a partnership may seem a distant concern. Yet your very first agreement needs a clear exit route: what happens if a franchisee wants to sell their business, the agreement is not renewed or serious problems arise in the relationship? Planning for the end protects both the network you have founded and the independent franchisee, and helps prevent customers from being left in limbo.

1. Understand the legal limits on contractual freedom in Finland

Finland has no specific franchising act, statutory registration requirement for franchise agreements or dedicated franchise disclosure law. This does not mean you can put anything you like in the agreement. General principles of contract law are relevant when assessing exit provisions, as is, for example, the Finnish Contracts Act, section 36 of which allows an unreasonable contractual term to be adjusted or set aside.

The Finnish Competition Act and EU competition rules affect non-compete clauses. The Finnish Trademarks Act and Trade Secrets Act concern the protection of brand identifiers and confidential know-how. Customer data must be handled in accordance with the EU General Data Protection Regulation and the Finnish Data Protection Act. These obligations do not disappear when the agreement ends.

The Finnish Franchising Association’s Code of Ethics is a form of industry self-regulation, not legislation. Whether it is binding must be assessed by reference to factors such as membership and commitments incorporated into the agreement. Your draft should therefore distinguish between legal requirements, any ethical commitments and your own commercial choices.

Do not assume that a choice-of-law clause removes the mandatory rules applicable in Finland. Have the agreement reviewed as a whole by a lawyer experienced in franchising before offering it to prospective franchisees.

2. Distinguish between expiry, termination on notice and termination with immediate effect

An agreement can end in several different ways. Define at least the following routes separately:

• Expiry of a fixed term: when does the agreement end, and how will any renewal be negotiated?
• Termination on notice: in what circumstances can the agreement be ended with notice, and how must that notice be served?
• Termination with immediate effect: what kind of material breach may justify ending the agreement immediately?
• Mutual termination agreement: how can the parties agree on an orderly exit during the contract term?

As a general rule, a fixed-term agreement cannot be freely terminated on notice before its term expires. If you want to include an ordinary right to terminate on notice, define it clearly. Set a timetable for renewal negotiations too, so that the franchisee does not have to make decisions about their premises lease or a new investment without knowing whether the relationship will continue.

Consider the contract term in relation to the franchisee’s investment. Do not require a major overhaul of the business format shortly before the term ends without discussing renewal and how the costs will be dealt with. The provisions should form a coherent whole, rather than a list of conflicting deadlines.

3. Establish a process for remedying breaches before resorting to termination

Not every failure to meet quality standards justifies immediate termination. As the founder of a franchise network, you need a process that distinguishes a remediable day-to-day error from a serious breach. Otherwise, enforcing the agreement can easily turn into a personal dispute.

Set out how a breach will be identified, who receives the notice, when a response is expected and how the remedy will be demonstrated. Specify a period for remedying the breach that is appropriate to its nature, as well as circumstances in which immediate action may be justified. A serious safety risk, for example, calls for a different approach from a single late report.

Document findings objectively: what happened, what the agreement requires and what action is being requested. Give the franchisee an opportunity to provide their own explanation. Also agree that the responsible representatives will discuss the matter before referring it to the agreed dispute resolution procedure, unless its urgency requires otherwise.

Consider obligations on both sides. The agreement should also spell out clear consequences for a serious failure by the franchisor to provide promised support. Trust within the network will suffer if only the franchisee’s failings are defined in detail.

4. Agree on the practical handover and data handling

Attach an exit checklist to the agreement. Its purpose is to ensure that the final day of trading does not leave outstanding responsibilities towards customers or uncertainty over use of the brand.

Cover, at a minimum, the removal of branding from premises and digital channels, withdrawal of access rights, return of materials and handling of outstanding invoices. Agree what will happen to stock and equipment, including any buyback arrangements: neither an obligation to buy nor a particular price should be assumed without an agreed basis.

Address gift cards, advance payments, unfulfilled orders and customer complaints separately. The allocation of responsibility between the parties must not undermine customers’ statutory rights. Customer communications should make clear which business is responsible for what, and where customers can get help.

The customer database does not automatically transfer to the franchisor. Establish the parties’ roles as data controllers, the lawful bases for processing, privacy information requirements and retention obligations before transferring or deleting data. Nor can staff, a lease or other contracts be transferred simply through a clause in the franchise agreement; any proposed transfer of the business requires a separate assessment.

5. Test the terms against different franchisee exit scenarios

Review the draft using three hypothetical cases: a franchisee retires, a profitable business is sold, and the relationship ends because of a material breach. In each case, identify the required notices, deadlines, decision-makers and responsibility for costs. If an answer can only be found in a verbal promise, clarify the agreement.

For a business sale, define when consent is required and the criteria for approving a new franchisee. Address a sale of the business and a change in ownership of the company separately. The process should protect the network’s standards without making the franchisee’s exit unnecessarily uncertain.

Have any post-termination non-compete clause reviewed separately. The EU Vertical Block Exemption Regulation (EU) 2022/720 covers such clauses only under limited conditions, including a maximum duration of one year and the restriction being indispensable to protect know-how transferred to the franchisee. A one-year limit alone does not make a clause acceptable, and falling outside the block exemption does not, by itself, determine whether it is lawful.

Practical takeaway: draw up your exit checklist before the first agreement is signed, and work with a lawyer to align it with the contract. A well-designed exit route strengthens the franchise network from the start of the relationship.