Buying a Franchise: Calculate Your Exit Costs Before Signing

Buying a franchise means preparing to open your business while also understanding what happens if you need to leave one day. An outlet that no longer suits your family circumstances or finances may not be something you can simply close without further obligations. Clear exit rules help both parties bring the franchise relationship to an orderly end. Check the costs of voluntary termination before signing the contract, rather than waiting until your business funds are running low.

1. Distinguish between ceasing trading and ending the contract

Closing your outlet does not automatically end the franchise agreement. Until the contractual relationship has ended under the agreed procedure, some payment or reporting obligations may continue. Likewise, expressing a wish to leave is not necessarily the same as securing approval to terminate.

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This framework governs franchise operations, including written agreements, disclosure prospectuses and the franchise registration certificate, known locally as the STPW (Surat Tanda Pendaftaran Waralaba). Agreements are also subject to the general contract law provisions in Book III of the Indonesian Civil Code.

However, franchise regulations do not mean that franchisees are free to leave at any time without financial consequences. You need to read the contract’s termination rights, procedures and consequences alongside the applicable law.

When reviewing the documents, distinguish between three situations: expiry at the end of the agreed term, early termination by mutual agreement, and termination for breach. This guide focuses on the second: you want to leave early, even though you are not in a dispute.

Ask whether voluntary termination is permitted, whose approval is required and how much notice you must give. Avoid relying on verbal assurances such as “we can discuss that later”.

2. Map out every potential payment

Ask the franchisor to identify every clause that could trigger a payment when you leave. Do not look only for the word “penalty”: similar costs may appear as administration fees, compensation, reimbursement for facilities provided or settlement of specific obligations.

Create a list with four columns: payment type, trigger, calculation basis and due date. At a minimum, check:

• Bills up to the effective termination date, including unpaid royalties and recurring fees.
• Early termination compensation, if required under the contract.
• Repayment of discounts or subsidies, such as opening support conditional on operating for a minimum period.
• De-branding costs, such as removing signs and changing the outlet’s appearance.
• Binding orders for goods not yet received when you decide to leave.

Be wary of wording that requires payment of all fees for the remaining contract term without explaining how they are calculated. Request a written worked example and clarification on whether several charges can apply at once. Do not immediately assume that such a clause is valid or invalid; ask a legal adviser to assess its wording and the specific circumstances.

As an exercise, choose a hypothetical exit date. Calculate all obligations up to that date, then separate out those that would continue afterwards. This is not a prediction of failure, but a way to assess how much risk you can afford to bear.

3. Establish what happens to stock and money still held

Remaining stock is often assumed to retain its full value, yet your ability to sell it may change once your right to use the brand ends. Branded products, bespoke packaging and short-shelf-life ingredients need specific arrangements.

Ask whether the franchisor is willing to buy back stock. Do not assume that buyback is an automatic right. If it is agreed, put in writing which goods will be accepted, the required packaging condition, minimum remaining shelf life, valuation method, delivery costs and payment schedule.

If you are allowed to sell stock during a transition period, make sure the deadline is clear and that permission to use the brand remains valid for that activity. Permission to sell off stock should not be confused with an extension of the entire franchise relationship.

Also check any security deposits or advance payment balances still held by the franchisor. Request terms covering permitted deductions, supporting invoices and the deadline for returning the balance. These funds may not be immediately available to cover your exit costs.

Draw up a separate list of obligations to customers, such as paid orders that have not yet been fulfilled. Agree who will fulfil orders, issue refunds and communicate the closure, so customers are not passed back and forth between the outlet and head office.

4. Negotiate a documented final settlement

Before buying, propose a termination procedure with a clear sequence: notice, a review of obligations, agreement on the effective date, settlement of payments and written confirmation. These are points for negotiation, not terms that every franchisor is guaranteed to accept.

Ask for an itemised final calculation and an opportunity to review any discrepancies. Where possible, agree a deadline for submitting final bills and a process for handling charges that only come to light later. The settlement document should identify which obligations have been discharged and which specific obligations remain in force.

Remember that an agreement with the franchisor does not automatically release you from debts or obligations to banks, landlords, other suppliers or employees. Include these in your exit budget, but distinguish who is entitled to collect each payment.

Practical step: before signing, prepare a one-page exit cost estimate and ask for confirmation of the contractual assumptions behind it. If you cannot calculate the total because the wording is too open-ended, resolve that uncertainty first.