Franchising in Portugal: assessing renewal and exit

Entering a franchise network also means understanding how you might leave it. Before choosing a brand, compare the contract term with the time needed to recoup your investment and establish what happens when it ends. A business may look attractive yet still expose the franchisee to costs, restrictions or a loss of value when the relationship comes to an end.

1. Compare the contract term with the investment payback period

The contract term should be assessed alongside your financial plan, rather than treated as a legal formality. The central question is simple: can the business recoup the investment within the period secured by the contract, without relying on an uncertain renewal?

Ask your accountant to prepare a cash flow forecast that includes the initial investment, remuneration for your work, loan repayments and foreseeable equipment replacements. Also test scenarios involving a delayed opening and lower-than-expected sales.

Then compare that forecast with three dates:

• The start date of the franchise agreement.
• The date the outlet actually opens to the public.
• The end date of the agreement and related commitments, such as the lease and financing arrangements.

If the term starts when you sign, delays in building work or licensing may reduce your operating period. Seek written clarification of how such delays will be handled. Also check whether you will still have rent or loan repayments to make after losing the right to use the brand.

2. Understand whether renewal is a right or a possibility

A ‘renewable agreement’ does not necessarily mean renewal is guaranteed. There may be automatic renewal, an option subject to conditions, or simply the possibility of negotiating a new agreement.

Read the clause and note the answers to these questions:

• Who can prevent renewal, and how much notice must they give?
• Must notice be sent by registered post or another specified method?
• Must all outstanding debts and breaches of contract have been resolved?
• Will there be a further fee, a compulsory refurbishment or equipment replacement?
• Will the current terms remain in place, or will you have to sign the brand’s standard agreement in use at that time?

Ask for renewal requirements to be objective and verifiable. A vague reference to ‘satisfactory performance’ leaves room for disputes. If refurbishment work is required, seek agreement on how you will be notified, who will bear the cost and what additional operating term might accompany that investment.

Include renewal costs in your financial assessment. Do not treat them as distant expenses: they can substantially change your expected return.

3. Understand the Portuguese legal framework

Portugal has no specific franchise law or mandatory pre-contractual disclosure document designed specifically for franchising. This does not remove the general duties of disclosure and good faith.

A franchise agreement is a contract without its own dedicated statutory framework and rests on the freedom of contract provided for in Article 405 of the Portuguese Civil Code, within legal limits. Good faith in negotiations, including potential pre-contractual liability, is governed by Article 227; Article 762 is relevant to the performance of the agreement.

Where pre-drafted terms are used without individual negotiation, Decree-Law No. 446/85, on standard contract terms, is relevant. It imposes duties to communicate terms and provide information, and allows prohibited clauses to be scrutinised, including in business-to-business relationships, under the applicable rules. Signing a draft agreement does not automatically make every term it contains valid.

The rules governing agency agreements, established by Decree-Law No. 178/86, may apply by analogy to certain issues, depending on the circumstances. However, do not assume that you will automatically be entitled to a goodwill indemnity at the end of the franchise relationship: this depends on the facts and the relevant legal requirements.

The European Code of Ethics for Franchising is a self-regulatory reference, not a Portuguese law that applies universally. It recommends clarity on duration, renewal, transfer and termination. Check whether the brand is bound by the code and arrange an independent legal review of the draft agreement.

4. Distinguish selling the outlet from ending the agreement

Being able to sell equipment or transfer a business does not mean you can transfer the franchise agreement. The buyer may need the franchisor’s approval and may have to enter into a new agreement.

Before investing, check the criteria for approving a successor, any transfer fees and any rights of first refusal held by the franchisor. Also ask whether a change in shareholders requires approval.

For early termination, identify the breaches that give grounds to terminate the agreement, the deadlines for remedying them and any stipulated penalties. Do not confuse leaving for convenience with termination on the grounds of breach. If personal guarantees are involved, establish the conditions under which they will be released following a transfer or termination.

5. Budget for your exit before you enter

Prepare a list of costs and liabilities that may remain when the agreement ends: removing branding, restoring the premises, dealing with remaining stock, returning materials, equipment contracts and employment liabilities. Do not assume the franchisor will buy back products or assets without a written commitment.

Also examine confidentiality and non-compete obligations. Non-compete obligations are subject to legal limits, including Portuguese and EU competition rules; their validity requires a case-by-case assessment.

Practical conclusion: before buying, summarise the secured contract term, renewal conditions, transfer options and estimated exit costs on a single page. If the investment only works with a renewal that is not guaranteed, revisit your plan before signing.