Buying a Franchise: Check the Costs and Your Contractual Exit Rights

Buying a franchise means joining a franchise network and taking on contractual obligations. So do not just calculate the start-up costs: understand what happens if you need to sell the business, the contract is not renewed, or the outlet closes early. Checking your exit options before paying helps protect your capital and avoid obligations that continue after trading has stopped.

1. Distinguish between expiry, termination and transfer

These three situations have different consequences. A contract expires when its term ends. It is terminated early through an agreed mechanism or on specific legal grounds. A transfer, meanwhile, means that ownership of the business, or certain rights and obligations, passes to another party, subject to the necessary approvals.

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This regulation requires franchises to operate under agreements governed by Indonesian law. The minimum required content of an agreement includes its duration, the parties’ rights and obligations, dispute resolution, and procedures for renewal and termination.

The requirement to include these provisions does not mean franchisees automatically have the right to leave at any time without cost. Your exit rights, the procedures involved and their financial consequences must be assessed by reading the contract alongside the applicable law.

Flag every clause relating to the end of the franchise relationship. Also check schedules, personal guarantees and equipment purchase agreements: important obligations may appear in separate documents.

2. Check termination triggers and opportunities to remedy breaches

Make two lists: circumstances that allow the franchisor to terminate the contract, and circumstances that allow you to do the same. Do not read only the section headed “termination”; missed payments, breaches of purchasing obligations or changes in ownership may also trigger termination.

Questions to have answered in writing include:

• Which breaches can lead to immediate termination?
• Must written notice be given first?
• Is there an opportunity to remedy a breach, and what is the deadline?
• What happens if the franchisor fails to meet its key obligations?
• Do weak sales provide grounds for exit, or do they remain the franchisee’s risk?

Be wary of terms such as “damage to reputation” or “unsatisfactory performance” without clear criteria. Ask for an explanation of the evidence required, the assessment process and the procedure for challenging a decision.

Do not assume that physically closing the outlet automatically ends the contract. Unilaterally stopping payments or ceasing to use the system could trigger a dispute. If you want to exit because of an alleged breach by the franchisor, retain the evidence and seek legal advice before acting.

3. Calculate all exit costs, not just penalties

Exit costs can arise under several contractual relationships. The end of a franchise agreement does not necessarily end your premises lease, loan agreement, supplier contracts or obligations to employees.

Prepare a cost worksheet using the following categories:

• Obligations to the franchisor: outstanding invoices, termination fees where agreed, and settlement of funds held on deposit.
• Premises obligations: remaining rent, reinstatement work, removal of branding, and the terms for returning the deposit.
• Operating obligations: supplier debts, customer orders, taxes and employee entitlements under applicable employment law.
• Financing obligations: outstanding principal, interest, early repayment charges, and the release of collateral or personal guarantees.

Separate costs that are certain, conditional or still to be confirmed. Do not count equipment resale proceeds as guaranteed income until you have checked ownership, condition and any restrictions on its sale.

Compare exit scenarios before opening, during trading and at the end of the contract. Use figures from documents and actual quotations, rather than marketing estimates. Ask lenders to explain whether selling the outlet requires repayment or separate approval.

4. Make sure you can sell the outlet without retaining liabilities

Selling an outlet does not always mean the buyer acquires the right to use the brand. A prospective buyer may need the franchisor’s approval, have to pass a selection process or be required to sign a new contract.

Check the approval conditions, transfer fees, buyer eligibility criteria and whether the franchisor has a right of first refusal. Also ask whether the existing contract term continues or a new term begins, and who pays for any refurbishment required on transfer.

The most important point is the seller’s release from liability. Ask for documentation stating when your responsibility ends. Approval of a new buyer does not necessarily release you as a guarantor of debt or as a party to the original contract.

If a transfer is not possible, check your renewal options. You need to know the notice deadlines, new fees and outlet refurbishment requirements from the outset. Do not assume renewal is automatic or that the fees and terms will stay the same.

5. Agree closure procedures before signing

Ask for a checklist of actions required after termination: ceasing to use the brand, returning confidential manuals, dealing with stock, fulfilling outstanding orders and removing the outlet’s branding from digital channels. The use of customer data must continue to comply with personal data protection obligations; do not assume it can be transferred freely.

Agree who will inspect the closure, what documentation will be issued to confirm settlement of obligations, and which dispute resolution procedures will apply. Before accepting the terms, ask a lawyer to assess penalty clauses, restrictions on business activities after the contract ends, and personal guarantees.

Practical step: before paying, prepare a one-page exit plan covering triggers, notices, approvals, costs and evidence of release from liability. If any element remains unclear, resolve it in writing first.