Franchising: when negotiations fall through

When turning an existing business into a franchise network, not every discussion will lead to a partnership. Deciding not to proceed with a prospective franchisee may be entirely reasonable. What matters, however, is how you reached that point: what assurances you gave, what spending you encouraged and when you disclosed any obstacles. Within the franchising community, handling unsuccessful negotiations responsibly protects both businesses and the trust between them.

1. Understand pre-contractual liability

Greece has no specific law comprehensively governing franchise agreements, nor a mandatory pre-contractual disclosure regime specifically for franchising. That does not mean negotiations take place without rules.

Article 197 of the Greek Civil Code requires parties negotiating a contract to act in accordance with good faith and accepted commercial practice. Article 198 provides for liability for loss caused through fault during negotiations, even if no contract is ultimately concluded.

Failed negotiations do not automatically create an obligation to pay compensation. Nor is there a general obligation to sign simply because discussions have progressed. What matters is the particular conduct, fault, loss and the causal link between them. Any potential claim requires a case-specific legal assessment; it does not automatically equate to the profits someone expected to earn from the outlet.

The European Code of Ethics for Franchising is a self-regulatory framework, not a Greek law of general application. Its principle of providing full and accurate written information within a reasonable time before any commitment reinforces the practical value of early transparency.

2. Set clear stages without implying that an agreement is certain

Before you start looking for franchisees, map out a simple sequence of stages: initial introductions, exchange of information, assessment, consideration of a specific proposal and a final decision. At each stage, explain what has been completed and what remains unresolved.

A positive meeting does not amount to approval of a franchise partnership. If financial checks, a site assessment or an internal decision are still required, say so explicitly. Avoid phrases such as “we’re definitely going ahead together” when significant conditions remain outstanding.

After each important discussion, send a brief written summary covering:

• the points on which there is agreement,
• outstanding issues that could prevent the partnership from proceeding,
• the next steps and who is responsible for each,
• expenditure you are not yet asking the prospective franchisee to incur.

Stating that discussions do not constitute a final agreement is useful, but it is not a blanket safeguard. It does not cancel out contradictory assurances or conduct that creates a reasonable expectation that the partnership has effectively been approved.

3. Monitor the expenditure you prompt

The most significant practical risk arises when a prospective franchisee starts spending because they believe they are following your instructions. This might involve feasibility studies, travel, professional fees or equipment orders. Not all expenditure carries the same significance or is automatically treated in the same way.

Keep a simple record of preparatory expenses. Note who proposed each expense, its purpose, whether it is necessary at that stage and whether it can be deferred. Clarify in writing who will bear the cost, without presenting a general statement allocating expenses as a release from all legal liability.

For example, if you request a measured survey of premises to decide whether you are interested, explain that the assessment is still ongoing. Do not simultaneously encourage orders that cannot be cancelled by giving assurances that only the formality of signing remains.

Apply the same rule to everyone who communicates with prospective franchisees. An external franchise development consultant may create expectations that management knows nothing about. A clear approval process is needed before anyone gives instructions to incur significant expenditure.

4. Bring discussions to a timely and clear close

As soon as you identify a serious obstacle, inform the prospective franchisee without undue delay. If you need time to reconsider, explicitly distinguish a temporary pause from a final decision to end discussions. Do not leave negotiations appearing active simply to keep an alternative option available.

Your final communication should record the decision, the genuine main reason for it and any outstanding practical matters. Check whether any separate commitments remain in force, such as a confidentiality agreement or a specific commission for work. Arrange for materials to be returned and any trial access to be withdrawn, while lawfully retaining the necessary evidence.

If a claim for reimbursement of expenses is made, request an itemised breakdown and supporting documents. Do not accept or reject the claim outright before a legal adviser has reviewed the correspondence and circumstances.

Practical takeaway: before your next meeting, introduce a written summary of the current stage and a review of the expenditure you request. Clear communication while uncertainty remains is more effective than explanations after the partnership has fallen through.