Exiting a Franchise in Hong Kong: Agree Stock Buyback, Clearance and Disposal Terms Before Signing

When buying a franchise, the initial stock order is often treated as part of the start-up investment. Fewer people ask: who takes the remaining stock when the relationship ends? Franchisors need to protect product quality and brand image, while franchisees need to recover the money tied up in stock. These aims do not necessarily conflict, but buyback, clearance and disposal procedures need to be set out before signing—not negotiated at the point of exit.

1. Distinguish ownership of goods from the right to sell them

Paying for goods does not mean you can continue selling them as a branded franchise outlet once the franchise ends. Ownership of the goods, permission to use trade marks, access to sales channels and franchise status are separate issues. For example, you may own a batch of packaged food, but your right to use the shop signage and the brand’s online shop may have ended. Repackaging goods or using promotional images for a clearance sale may also require additional permission.

Hong Kong has no franchise-specific legislation, nor any generally applicable statutory pre-sale disclosure regime, franchise registration requirement or mandatory code of conduct for franchising. A franchisor does not automatically have a statutory duty to buy back all stock simply because the franchise relationship has ended.

The relevant rights depend primarily on the contract and general law. Common law contract principles govern contractual obligations; the Sale of Goods Ordinance covers matters including the sale of goods, transfer of ownership and applicable implied terms; and the Trade Marks Ordinance and Copyright Ordinance may affect how brand identifiers and promotional materials can be used during clearance sales. You should neither assume that selling any remaining stock necessarily infringes intellectual property rights nor that buying the goods gives you every right to use the brand. Ask a lawyer to assess the position based on the goods’ source, condition and proposed sales method.

Before signing, draw up a stock classification schedule. Separate finished branded products, raw materials, packaging bearing the brand’s logo and general consumables. Record which items have been purchased, which are held on consignment and which are subject to retention-of-title clauses. You need to establish who owns what before discussing exit arrangements.

2. Turn buyback promises into terms you can calculate

“The brand may, at its discretion, assist with surplus stock” is not a firm buyback commitment. Ask for the contract to specify whether buyback is mandatory, which legal entity will pay and which goods qualify. If another company actually supplies the goods, a verbal promise from the franchisor is especially inadequate as a substitute for the supplier’s written obligations.

A buyback schedule should answer at least the following questions:

• When does it apply? Will the same arrangements apply on normal expiry, non-renewal, the brand ceasing supply and early termination for different reasons?
• Which goods qualify? Will only unopened goods with intact packaging, specified batch numbers and sufficient remaining shelf life be accepted? How will seasonal goods, discontinued products and promotional giveaways be treated?
• How is the price calculated? Will it be the original purchase price, the cost after discounts already received, or a separately agreed reduced price? Who pays transport and inspection costs?
• How does payment work? When will stock be counted, inspected, accepted and paid for? Can other outstanding debts be set off against the payment? Will a dispute over part of the amount delay payment of the undisputed balance?

Do not focus solely on the buyback percentage: check the grounds for rejection too. For example, if the brand can change its packaging at any time and then reject goods because the “old packaging does not meet specifications”, the buyback protection may prove ineffective. Consider negotiating for the specifications approved on the order date to be the benchmark, and specify how stock affected by the brand’s packaging changes will be handled.

3. A clearance period must come with usable permissions

If the brand will not agree to a buyback, a limited clearance period may be an alternative. But permission to clear stock is not enough on its own. The contract should also define the goods that may be sold, the timeframe, locations and channels, and which brand identifiers and promotional materials may be used during that period. This avoids a situation where sales are permitted but the permissions needed to complete them are withdrawn.

For example, permission to clear stock only at the original premises is of little practical use if the shop’s lease has already ended. If another approved outlet is to sell the stock on your behalf, first confirm that this does not breach channel restrictions, and specify responsibility for delivery, collecting payments and returning unsold goods. If access to the brand’s membership or sales systems will be switched off, arrange independent sales and refund records in advance.

The clearance schedule should also specify:

• The stock that may be sold, and whether buying additional stock is prohibited;
• Whether royalties remain payable on clearance sales and how those sales must be reported;
• Who handles returns, warranty claims, complaints and product recalls;
• What happens to any unsold stock once the clearance period ends.

Contractual permission to clear stock cannot override legal requirements for products that are expired, unsafe or otherwise unlawful to sell. Clearance sales should not mislead consumers into thinking the outlet still has full franchise status. Ask the brand to approve suitable customer-facing wording in advance.

4. Manage disposal costs alongside final orders

Packaging bearing the brand’s logo, non-returnable ingredients or materials, and products not approved for clearance may all incur transport, storage and destruction costs. When signing, specify who can decide the disposal method, who selects the service provider and what evidence of costs is required. This helps prevent one party from imposing an expensive solution and charging the other for the full amount.

Where destruction is required, agree on stock-count records, photographs or a certificate from the service provider. Clearly distinguish between items that must be destroyed, those that can have their branding removed and those that can be repurposed for general use. Regulated waste and specialist products must still be handled in accordance with applicable disposal requirements; following the brand’s instructions alone is not enough.

Effective protection also means avoiding a build-up of new stock as the relationship nears its end. Consider negotiating adjustments to minimum order quantities, automatic replenishment and seasonal purchasing once notice of non-renewal or termination has been given. If the brand still requires orders to be placed, confirm the buyback terms for those additional goods at the same time. This is not about allowing franchisees to stop performing their obligations at will, but about fairly allocating final-stage supply needs and stock risks.

Practical takeaway: Before signing, ask the brand for a stock exit schedule that specifies, for each category, “who takes it, at what price, when payment is due and who handles disposal if it cannot be sold”. Then test the terms against a batch of unopened goods, a batch nearing expiry and a batch in old packaging. If the outcome for any of them remains unclear, resolve it before paying.