Franchise agreements: how to plan a safe exit

Joining a franchise network is a long-term commitment, but it is worth settling the terms of your exit before you buy. Illness, relocation, changes in the business environment or simply different business ambitions may all be reasons to leave. A well-prepared agreement does more than support the working relationship: it also sets out how you can end it with manageable costs, settled obligations and no avoidable legal disputes.

1. Distinguish between expiry, termination and selling the business

An exit is not a single legal event. Different rules apply when a fixed term expires, when either party terminates the agreement, or when you want to transfer the business to a new owner. Draw up a separate checklist for each scenario, as approvals, deadlines and payment obligations may differ.

Hungary has no standalone, comprehensive franchise act, but it would be wrong to say that franchise agreements are unregulated. Act V of 2013, the Hungarian Civil Code, regulates franchise agreements in Sections 6:376–6:381 under the term ‘jogbérleti szerződés’. The Civil Code’s general rules on contracts also apply, alongside other legislation depending on the issue involved.

For franchise agreements of indefinite duration, the Civil Code sets notice periods that increase over time: one month in the first year, two months in the second, and three months in the third and subsequent years, with termination taking effect on the last day of a calendar month. Ask a lawyer to check any departures from these rules in your agreement and their legal effect.

For a fixed-term agreement, do not assume that you can leave at any time without giving a reason. Look for an express right to terminate early, as well as the conditions for extension and automatic renewal. Review termination for breach of contract separately.

2. Make the grounds for termination measurable

An agreement that ties termination to vague concepts such as ‘unsatisfactory performance’ creates risk. It must be clear what constitutes a breach, how it will be proved and whether there is an opportunity to put it right. A late report and a serious safety failure do not necessarily warrant the same consequences.

Ask for the agreement to set out clearly:

• the form of any formal notice and the address to which it must be sent;
• how the conduct complained of must be specified;
• the time allowed to remedy the breach, where appropriate;
• how repeated and serious breaches will be handled;
• the remedies available to you if the franchisor breaches the agreement.

The franchisee’s rights must also be specific. What happens, for example, if the franchisor persistently fails to provide a promised service that is essential to operations? There should be a clear process for reporting the problem, serving formal notice and taking further action to enforce your rights.

Franchisees generally enter into agreements for business purposes, so do not automatically expect a consumer right to withdraw. Seek legal advice before sending a termination notice: wrongful termination can itself give rise to claims.

3. Align the franchise term with the premises lease

Ending the franchise agreement does not, in itself, end your premises lease, loan or equipment lease. You could easily find yourself unable to operate the business in its usual form while still having to pay the associated bills.

Create a timeline for all key contracts. Mark their expiry dates, notice periods, deadlines for giving notice of renewal and conditions for releasing security. Check separately whether the premises can be used for another activity or transferred to a new operator.

A personal guarantee does not necessarily end when you sell the business. You may need the express consent of the lender or other beneficiary to be released. Similarly, do not assume that a security deposit will be available to you immediately.

Include separate lines in your cost forecast for any overlapping rent payments, reinstatement of the premises, removal of equipment and settling employment-related obligations. These costs may arise even if the franchisor has no further claims against you.

4. Do not assume you have an automatic right to sell the business

Selling a trading business may be preferable to closing it, but transferring the franchise agreement or changing the ownership of the operating company may require approval. The franchisor understandably wants to vet those joining the network; you, however, need a predictable process.

Clarify in advance the professional and financial requirements for a buyer, the deadline for an approval decision, any transfer fee and the cost of training. Also ask whether the incoming franchisee can continue on the existing terms or must sign a new agreement.

If the franchisor has a right of first refusal or another preferential right, have the procedure for exercising it reviewed as well. A sale plan is only realistic if the transfer conditions for the franchise, premises lease and financing can be brought into line.

5. Calculate the full cost of winding down

Ask for clear settlement rules covering stock, equipment, customer payments collected in advance and outstanding fees. Do not assume that the franchisor will buy back remaining stock or refund the initial franchise fee. If a buyback is available, its pricing, requirements for the condition of the goods and payment deadline must also be recorded.

Your closure checklist should include removing branding, revoking access rights, returning confidential materials and handling customer data lawfully. Transferring personal data is not simply a matter of commercial agreement: GDPR requirements must also be met.

Have any post-termination non-compete clause reviewed separately. Signing it does not, on its own, make it enforceable; Hungarian and, where applicable, EU competition law also matter. Confidentiality may remain a separate obligation.

Practical takeaway: before signing, prepare a one-page exit plan with deadlines, named responsibilities and itemised costs. Clarify any point you cannot complete with the franchisor and your own legal adviser before you buy.