Franchise agreements: term, renewal and exit

Turning an existing business into a franchise network means planning for relationships to end, not just for new outlets to open. The term, renewal and exit arrangements determine how long franchisees have to recoup their investment and how premises, customers and outstanding commitments will be managed when the relationship ends. Addressing these issues before offering your first agreement helps prevent disputes and promises that are difficult to keep.

1. Link the term to the franchisee’s investment

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 3 requires the agreement to be in writing, failing which it is void. It also provides that, for a fixed-term agreement, the franchisor must guarantee a term long enough for the franchisee to recoup their investment, and in any event no shorter than three years, without prejudice to early termination for breach by either party.

Three years is therefore a statutory minimum, not an automatically suitable term. If you are turning your business into a franchise network, you need to assess the investment required of prospective franchisees rather than choosing a term simply to match other agreements.

Prepare a breakdown distinguishing between:

• fit-outs and installations that would be difficult to reuse elsewhere;
• equipment that can be moved or resold;
• start-up costs, training and initial franchise fees;
• any further investment required during the relationship.

Compare these items with cautious financial forecasts, allowing for a slower start than expected. Do not confuse accounting depreciation and amortisation with actually recouping the investment: have an accountant check your reasoning and a lawyer review the proposed term. The contract term alone does not guarantee profitability.

Also check that it aligns with leases, financing arrangements and equipment hire agreements: a franchisee could remain liable for rent after losing the right to trade under the brand.

2. Set out renewal arrangements without creating implied expectations

Law No. 129/2004 requires the agreement to expressly state the conditions for renewal, termination and any assignment. However, wording such as ‘the relationship may be renewed by mutual agreement’ does not explain how the parties should prepare for that process.

Make a deliberate choice between automatic renewal, renewal subject to defined conditions, or fresh negotiations on expiry. For each option, specify how notices must be given, the relevant deadlines and the consequences of failing to reach agreement. Do not present renewal as certain if it remains subject to a discretionary decision.

If you set requirements for continuing the relationship, make them verifiable: timely payments, compliance with standards, completion of training or agreed upgrades. Avoid vague criteria such as ‘the franchisor’s complete satisfaction’, which leave little room for a transparent assessment.

Pay particular attention to refurbishment work. Before requiring new furnishings or installations near the end of the term, assess the costs and the remaining time available to use them. The agreement should explain how upgrades will be authorised and how they will be coordinated with renewal.

A sound internal procedure includes a discussion before expiry, with a written record of outstanding issues. Operational deadlines must align with contractual ones: starting discussions after the deadline for giving notice of non-renewal has passed makes them of little practical use.

3. Distinguish between expiry, withdrawal, termination and assignment

These events are not interchangeable. Expiry brings the agreed term to an end unless it is renewed; withdrawal (recesso under Italian law) allows one party to end the relationship where permitted by law or the agreement; termination (risoluzione) may arise, among other grounds, from a breach of contract. Assignment, by contrast, involves transferring the contractual relationship to another party.

Work with your lawyer to draw up a table setting out, for each event:

• the conditions and documents required;
• the party entitled to initiate the process;
• applicable notices and deadlines;
• any opportunities to remedy a breach;
• financial and operational consequences.

Do not prescribe the same response for an occasional delay and a serious breach. Clauses must take account of the Italian Civil Code as well as the specific rules governing franchising: a broadly worded clause does not automatically make immediate termination lawful.

For assignment, explain whether the franchisor’s consent is required, how the incoming franchisee will be assessed and what training they must complete. This also allows you to manage the departure of a franchisee who wishes to sell the business, rather than treating it simply as a new franchisee recruitment exercise.

4. Plan the operational handover before signing

Ending the relationship involves more than sending a notice. You need a plan, attached to or coordinated with the agreement, assigning responsibility for removing signage, ending use of the trade mark, returning confidential materials and closing off access to IT systems.

Also define how stock, orders already accepted, customer deposits, vouchers and requests for support will be handled. Do not assume there is an obligation to buy back stock: if one is included, specify the conditions and valuation criteria.

For customer data and contact details, check the parties’ roles and the lawful bases for processing under the GDPR: these do not automatically belong to the franchisor. Any post-termination non-compete obligations also require a specific review of the applicable civil and competition law rules.

These rules must be available to prospective franchisees before they commit. As a general rule, Law No. 129/2004 requires the complete agreement and the required annexes to be provided at least thirty days before signing.

Practical tip: before taking on franchisees, work through three scenarios: expiry without renewal, termination for breach and assignment. If you cannot say who must do what, by when and at what cost, the agreement and exit plan still need work.