Buying a Franchise: Planning for Contract Expiry and Exit

Joining a franchise network is usually a long-term commitment. Even so, your exit options should be on your checklist before you buy. The end of a franchise agreement does not automatically end your lease or discharge an outstanding loan. This guide explains which provisions to clarify before signing, so that a later parting of ways does not create an avoidable financial burden.

1. Align the contract term and renewal arrangements with your commitments

The contract term determines how long you may use the business concept and brand. It should allow for the investment required. A longer commitment can provide greater certainty for planning, but it also limits your flexibility. Germany has no general statutory minimum term for franchise agreements.

Compare your franchise agreement, premises lease, loan agreements and equipment leases side by side. For each document, note the start and end dates, notice periods and remaining payment obligations. A premises lease that continues after your right to use the brand has ended is a particular concern.

When reviewing renewal arrangements, check in particular:

• Do you have a binding renewal option, or merely the prospect of fresh negotiations?
• By when, and in what form, must you exercise the option?
• Will the existing terms remain in place, or will a new standard agreement apply?
• Will further fees, training or refurbishment be required?
• What circumstances could prevent renewal?

Ask for vague promises such as “renewal subject to a successful working relationship” to be made specific. What matters is whether they actually create an enforceable right. Also agree when a decision on renewal must be made, so that you are not left waiting for certainty until shortly before the agreement expires.

2. Understand termination rights and legal limits

Germany has no dedicated franchise legislation or national franchise register. Franchise agreements combine elements of different contract types; depending on their content, the German Civil Code (BGB) and Commercial Code (HGB) are particularly relevant. Standard contract terms are subject to sections 305–310 BGB, with special rules applying to business-to-business dealings. A clause is therefore not automatically enforceable simply because you have signed it.

A fixed-term agreement can generally only be terminated on notice before its expiry if the contract provides for this. There is no general right to walk away because the business has not met your expectations. However, either party may terminate a continuing contractual relationship for good cause under section 314 BGB. Whether good cause exists depends on the circumstances of the individual case. Where a breach of obligations is involved, the party seeking termination must generally first allow a period for the breach to be remedied or issue a formal warning, unless a statutory exception applies.

Check which breaches the agreement lists as grounds for termination. Could even minor departures from the rules have far-reaching consequences? Are there clear procedures for raising concerns and putting things right? In particular, obtain legal advice on blanket contractual penalties and demands for all future lost fees.

Disclosure duties arise even before the agreement is signed, as part of the pre-contractual legal relationship, particularly under sections 311(2) and 241(2) BGB, read together with section 242 BGB. Ask about significant restrictions on your exit options early on and document the answers. Germany has neither a legally standardised franchise disclosure document nor a uniform franchise-specific disclosure period. Allow sufficient time for review rather than relying on a later right to withdraw or terminate.

3. Make sure selling the business is a viable exit route

A saleable business can offer an alternative to closure. However, selling the fixtures, fittings and stock does not automatically transfer the franchise agreement to the buyer. The franchisor’s consent or a new agreement is often required.

Before joining, establish the criteria for accepting a successor. Relevant skills and adequate funding are reasonable requirements. By contrast, unclear decision-making procedures, a lack of response deadlines and unpredictable transfer fees make planning difficult.

Ask for answers to these questions:

• May you find prospective buyers yourself and show them confidential documents under agreed conditions?
• What consents are required for a sale of the business or shares in the company?
• Does the franchisor have a right of first refusal, and how is the price determined?
• Who pays the training, assessment and transfer costs?
• Will you be expressly released from personal guarantees and other security commitments on handover?

A sale does not automatically release you from personal obligations. For example, you need the bank’s consent to be released from a personal guarantee given to it. The transfer of the premises lease must also be addressed separately.

4. Identify costs and obligations after the agreement ends

Draw up your own list of exit costs. These may include taking down signage, removing protected design elements, reinstating the premises, updating your online presence and returning manuals or equipment. Also check what happens to remaining stock. Do not assume that the franchisor will buy it back unless this has been agreed.

Post-termination non-compete clauses require a separate review. Alongside contract law, German and EU competition law may be relevant, particularly section 1 of the German Act against Restraints of Competition (GWB), Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Regulation (EU) 2022/720. Such restrictions are not permitted without limits; their enforceability depends, among other things, on their purpose, duration and geographical scope.

Also clarify which customer data you may retain or transfer. Contractual clauses do not replace the need for a lawful basis under data protection law. Nor do franchisees automatically acquire a right to compensation by analogy with section 89b HGB; such a claim depends on specific conditions being met.

Practical takeaway: Before signing, have three exit routes costed and legally reviewed: expiry at the end of the agreed term, early termination and sale of the business. Record the deadlines, required consents, outstanding debts and follow-on costs for each route in writing.