Franchise agreements: planning for a franchisee’s exit

Turning an existing business into a franchise means thinking beyond the first openings. A franchisee may want to sell, retire or decide not to renew their agreement. Planning for these situations from the very first agreement protects your concept and the entrepreneurs who join your franchise network. The aim is to make the exit process clear, workable and compatible with business continuity.

1. Distinguish between the different ways of leaving the network

A general clause covering the ‘end of the agreement’ is not enough. Before consulting your solicitor, prepare a brief setting out the situations you need to address:

• Expiry: the agreement reaches the end of its term, with or without an option to renew.
• Sale or transfer: the franchisee sells their business or the shares in their company.
• Early termination: one party ends the agreement before its expiry, particularly following a breach, subject to the applicable contractual terms and legal requirements.
• Negotiated exit: the parties mutually agree the terms of their separation.

For each situation, identify who must notify whom, in what form and how much notice is required. Also specify the consequences for outstanding orders, amounts owed and use of the brand.

Do not confuse the term of the agreement with a guarantee of renewal. If you envisage a new agreement on expiry, explain how its terms, any refurbishment work and required investment will be discussed. Franchisees must be able to plan their decisions without learning late in the process that substantial refurbishment is required.

2. Regulate transfers without preventing a sale

A franchisee’s departure does not necessarily mean their outlet has to leave your network. A well-prepared transfer can preserve the customer base, jobs and the brand’s local presence.

The agreement should distinguish between the sale of the business assets and goodwill (the French fonds de commerce), the transfer of the franchise agreement and a change of control of the franchisee’s company. These transactions do not automatically have the same effects. Have your legal adviser specify which require your consent.

An approval clause allows you to assess the proposed buyer. To make it workable, set out a procedure: the documents required, the point of contact, the response deadline and the assessment criteria. Use factors relevant to the business proposal, such as access to funding, management experience and the ability to undertake the required training.

Avoid a process with no timetable, which would leave both seller and buyer in limbo. Also establish whether the buyer will take over the existing agreement or sign a new one: the remaining term and contractual obligations may affect the commercial appeal of the transaction.

If you include a pre-emption right, have its triggers and procedures drafted precisely. Then test the process against a hypothetical sale, from the first letter through to the change of operator. Any step that cannot be explained simply needs further work.

3. Prepare a practical exit process, not just a legal one

Ending the relationship involves more than taking down the signage. Draw up a checklist to attach to the agreement, distinguishing legal obligations from the practical steps needed to fulfil them.

It should cover, in particular:

• removing branding from the premises, vehicles and marketing materials;
• returning or deleting confidential documents, subject to record-retention requirements;
• withdrawing access to software and shared workspaces;
• dealing with stock, outstanding orders, deposits and unresolved complaints;
• updating local web pages and information provided to customers.

For stock, do not promise an automatic buyback without defining which products qualify, their required condition, how they will be valued and who will be responsible for transport.

Customer data requires particular care. Its transfer or deletion does not follow simply from ownership of the brand: the parties’ actual roles, the purposes of processing and the GDPR must all be taken into account. Have the planned steps checked before withdrawing access.

4. Check the clauses against French law

In France, franchising is based on a network of independent entrepreneurs whose relationship is governed, among other things, by contract law and competition law. There is no single statutory framework covering every aspect of a franchise agreement.

Article L. 330-3 of the French Commercial Code, introduced by what is known as the Doubin Law, requires pre-contractual disclosure where its conditions are met: a trade name, trademark or trading identity is made available in return for an undertaking of exclusivity or near-exclusivity in carrying on the business. In these circumstances, the pre-contractual disclosure document (known in France as the DIP) and the draft agreement must be provided at least twenty days before signing or, where applicable, before any required advance payment is made.

Article R. 330-1 requires disclosure of, among other things, the conditions for renewal, termination and transfer. Your documents must therefore be consistent on these points.

Also have any post-exit restrictions checked: confidentiality, non-compete and non-affiliation clauses do not serve the same purpose or have the same conditions for enforceability. Finally, a contractual notice period does not, on its own, resolve every issue relating to the abrupt termination of an established commercial relationship.

Key takeaway: before recruiting franchisees, run through a hypothetical sale and an end-of-contract scenario. If responsibilities, timescales or costs remain unclear, clarify them with your legal adviser before presenting your proposal to prospective franchisees.