Exiting a franchise: what should you agree before signing?

When buying a franchise, it is easy to focus solely on getting started. Yet the security of your investment also depends on how you can leave later. Before joining a franchise network, examine not only the operating rules but also the entire exit process. Having a right to terminate is not enough: you need to know when your right to use the brand ends, what you can keep and which financial obligations arise when the relationship ends.

1. Clarify how the relationship can end

Hungary has no standalone, comprehensive franchise act, but it does have specific civil law provisions: Act V of 2013, the Hungarian Civil Code, regulates franchise relationships as franchise agreements (known in Hungarian as jogbérleti szerződés). General contract law provisions also apply. The sector’s code of ethics does not replace these rules and does not, by itself, provide a general right to exit.

Start by distinguishing between fixed-term and indefinite-term agreements. With a fixed-term agreement, do not assume that you can leave at any time simply by giving advance notice. Check whether the contract allows early termination without cause, and on what terms.

For indefinite-term franchise agreements, the Civil Code’s termination provisions set a notice period based on how long the relationship has lasted. Ask a lawyer to review the terms of your particular contract and any departures from the statutory rules.

List each of the following ways the relationship could end separately:

• expiry of the fixed term;
• termination under a contractual or statutory right;
• termination for breach of contract;
• termination by mutual agreement.

For each, note the formal notice or declaration required, the deadline and the financial consequences. Do not treat mutual agreement as a guaranteed escape route: it will also require the franchisor’s consent at the time.

2. Ask for a clear procedure for addressing breaches

There is an important difference between a correctable operational mistake and a serious breach of obligations that could bring the relationship to an end. Check whether the draft agreement clearly defines the grounds for termination. Wording such as “harm to the interests of the network” offers little help on its own when assessing the risk.

Where a problem can be put right, ask for written notice and a clear deadline for doing so. Agree what the notice must contain, how its delivery will be evidenced and how you can demonstrate that the problem has been resolved. This is a point to negotiate, not a grace period that applies automatically in every case.

Review your own rights too. What happens if the franchisor persistently fails to provide the agreed services or does not make the rights needed to operate the business available to you? The agreement should clearly explain how to report the problem, when you can demand performance and on what terms you can end the relationship.

Operating during the notice period is particularly important. Clarify whether you will retain the necessary system access, support and ability to place orders, and which fees you will pay during this time. Giving notice and the contract actually ending are not the same event.

3. Calculate the full financial cost of leaving

The cost of leaving may not appear as a single “exit fee”. Obligations under several different contracts may add up just as your ability to earn revenue under the brand comes to an end.

Prepare an exit cost breakdown covering at least the following:

• franchise fees payable up to the end of the agreement and any final settlement items;
• any contractual termination fee or other payment claim;
• removal of signs, decorations and branding;
• packaging and branded stock that you can no longer use;
• continuing obligations under tenancy, leasing or service agreements;
• any employee-related costs arising from the closure or transition.

Ending the franchise agreement does not, in itself, end your contracts with other parties. If the lease on your premises runs for longer, for example, you may still have to pay for it after you lose the right to use the brand.

Do not assume that the franchisor will automatically buy back your remaining stock. If it is willing to do so, put the requirements in writing, including acceptable condition, remaining shelf life, pricing, transport and the payment deadline. Likewise, clarify whether any prepaid fees will be refunded; do not treat this as an automatic entitlement.

4. Put a workable exit timetable in place

The end of the agreement must also address the expiry of the rights to use the franchise system. Do not automatically plan to hold a clearance sale under the old brand name. If you want a transitional period in which to sell remaining stock, its duration and terms must be agreed in writing beforehand.

Ask for an exit schedule to be attached to the agreement. It should specify who will remove physical branding, update online business listings, return manuals and deal with system access, and by when. The return and deletion of materials must also take account of mandatory record-retention and data protection requirements.

Agree how outstanding orders and prepaid services will be handled too. Your commitments to customers do not disappear simply because you leave the franchise network. Assign responsibility for fulfilling them, set deadlines and document the financial settlement.

Prepare a written record of the exit, distinguishing between completed tasks, disputed amounts and outstanding obligations. Only agree to a general waiver of claims after obtaining a legal review of its consequences.

Practical takeaway: before signing, ask for an exit plan that can be completed with dates, responsible parties and cost items. If it does not make clear when you can end the relationship and what it will cost, the contract needs further negotiation.