Exiting a Franchise: What to Agree Before You Buy

When buying a franchise, entrepreneurs usually discuss opening an outlet, not closing it. Yet the ability to exit the agreement with clearly defined costs is an important part of due diligence. In a responsible franchise network, this discussion does not signal distrust: it helps both parties establish in advance what happens if the venture fails. You need to check not just the grounds for termination, but the entire process from giving notice to settling the final accounts.

1. Establish a legally effective route out

In Russia, arrangements granting a bundle of exclusive rights that includes the right to use a trade mark are governed by Chapter 54 of the Russian Civil Code, which covers commercial concessions. The document’s title alone is not decisive: if the seller offers a licence agreement or a mixed agreement, the applicable termination rules must be determined by its substance.

Article 1037 of the Russian Civil Code is particularly important for commercial concessions. Where an agreement has no fixed term, either party may withdraw by giving the other six months’ notice, unless the agreement requires a longer notice period. An indefinite agreement therefore does not mean you can leave immediately.

For both fixed-term and indefinite agreements, the same article also allows withdrawal on at least 30 days’ notice if the agreement provides for termination in return for an agreed payment in lieu of performance. This is not a universal right to exit any franchise within a month: the relevant provision must be included in the agreement.

Before buying, ask a lawyer to distinguish between three routes: unilateral withdrawal, termination by mutual agreement and termination through the courts. Wording such as ‘the franchisee may request termination’ guarantees only the ability to ask, not the right to end the relationship.

2. Check the notice procedure and termination date

Even a suitable ground for exit is of little use without a clear procedure. Establish who must receive the notice, which address to use, whether electronic document exchange is permitted and what evidence of delivery is required. General rules on legally significant communications are set out in Article 165.1 of the Russian Civil Code, but the contractual terms also need checking.

Propose including the following sequence of steps in the agreement:

• sending notice by the prescribed method;
• establishing the termination date, taking the notice period into account;
• reconciling payments and accounting for materials supplied;
• ceasing use of the brand;
• completing the necessary registration formalities.

Under Article 1037 of the Russian Civil Code, early termination of a fixed-term commercial concession agreement and termination of an indefinite agreement must be registered with the state. Allocate responsibility in advance for preparing and submitting documents to Rospatent, Russia’s intellectual property office, paying the official fee and providing confirmation.

Do not accept without discussion a provision that makes termination depend entirely on the rights holder signing a final settlement statement. Otherwise, a dispute over a small sum could delay formalising your exit. It is better to expressly agree, in accordance with the law, when obligations end and what happens if paperwork is delayed.

3. Calculate your obligations before and after closure

Closing the premises and ending the agreement are separate events. Simply not using the rights granted does not generally release you from the obligation to pay fees. This approach is reflected in paragraph 40 of Resolution No. 10 of the Plenum of the Supreme Court of the Russian Federation, dated 23 April 2019. You should therefore not assume that royalties stop automatically when sales cease.

Prepare a separate exit budget. Include payments during the notice period, any agreed termination payment, outstanding debts, the cost of removing branding and costs under the outlet’s separate contracts. The lease, equipment servicing arrangements and employment relationships will each have their own termination procedures: ending the concession agreement does not replace them.

Request a written calculation for a specific scenario: you notify the rights holder, stop trading and then reach the agreement’s termination date. At each stage, it should be clear which charges continue to accrue and when they stop.

Discuss advance payments and the security deposit separately. An initial franchise fee is not automatically refundable simply because the outlet proves unprofitable. Whether a refund is available depends on the grounds for termination, the performance of obligations and the contractual terms. Record the deadlines for reconciling accounts, permitted deductions and the procedure for returning the remaining security deposit.

4. Agree brand removal and what happens to remaining stock

Once your right to use the brand ends, do not rely on informal permission to ‘keep trading under the sign a little longer’. Draw up a list of everything from which branding must be removed: the shopfront, interior, packaging, staff uniforms, the outlet’s online pages and advertisements.

For each item, specify who is responsible, the deadline and how completion will be confirmed. If removal requires access arranged by the landlord or the services of a contractor, agree a realistic schedule in advance. A deadline for removing branding should not itself be treated as permission to continue trading under the brand.

Remaining products and branded consumables need particular attention. Do not assume either that the rights holder must buy them back or that selling any remaining goods is strictly prohibited. Whether they can be sold depends on their origin, the rights to the branding and the specific contractual terms. Ask for the arrangements for return, buy-back, permitted sale or disposal to be set out separately for each category.

5. Check which obligations will survive

Exiting a franchise does not wipe out existing debts or liability for earlier breaches. Confidentiality obligations may also continue. Draw up a clear, exhaustive list of contractual obligations that survive termination, specifying their duration wherever possible.

Agree the return of manuals and the withdrawal of access to materials, while preserving the ability to retain documents needed for accounting, legal compliance and defending your position in a dispute. The final settlement statement should reflect the actual financial position, rather than require an unconditional waiver of all claims before checks are complete.

Practical takeaway: before buying, prepare a one-page exit plan covering the legal basis, notice, termination date, final payments, brand removal and registration formalities. If even one item depends solely on the seller’s future goodwill, the agreement needs further work before you pay.