Exiting a Franchise: What to Check Before You Buy

When buying a franchise, entrepreneurs usually calculate the cost of opening, but rarely the cost of closing. Yet shutting an outlet does not automatically end the agreement: royalties, purchasing obligations and other payments may continue. A clear exit process protects both sides of a franchise relationship. Check it before paying the initial franchise fee, while the terms are still open to negotiation.

1. Establish exactly how you can end the agreement

Russia has no standalone franchising law, but commercial concession arrangements are specifically governed by Chapter 54 of the Russian Civil Code, Articles 1027–1040. General rules on obligations and contracts also apply, while intellectual property rights are governed by Part Four of the Code. If you are offered a licence agreement or a mixed agreement, its termination rules need to be assessed on the basis of its substance, rather than the label ‘franchise’.

Article 1037 of the Russian Civil Code is particularly important for commercial concessions. Either party may withdraw from an agreement with no fixed term by giving the other party six months’ notice, unless the agreement specifies a longer period. If the agreement allows termination through payment of an agreed exit fee, either a fixed-term or an indefinite-term agreement may be ended with at least 30 days’ notice.

This does not mean that any fixed-term agreement lets you walk away freely on a month’s notice. You need to check the grounds for withdrawal and the exit fee provision in the text. Other routes, besides unilateral withdrawal, include termination by mutual agreement or through the courts where statutory grounds exist.

Ask a lawyer to draw up a brief exit roadmap covering:

• which grounds are available to you;
• whether the rights holder’s consent is required;
• how much notice you must give;
• what sums you will have to pay;
• the date on which your obligations end.

Look separately at what happens if the outlet is loss-making. Low revenue alone will not usually release you from agreed payments or give you an automatic right to terminate the agreement.

2. Calculate the full cost of leaving, not just any penalty

The phrase ‘no exit penalty’ tells you little about the actual cost. Minimum royalties and advertising levies may continue to accrue during the notice period. At the same time, you will still need to cover rent, payments due to employees, removal of branded fittings and storage of remaining stock.

Prepare a separate closure budget. Include:

• outstanding fees and amounts owed for purchases;
• payments due up to the termination date;
• the agreed exit fee, if you use that termination route;
• costs relating to the lease, supplies and equipment servicing;
• replacement of signage, packaging and other branded materials;
• obligations to customers relating to advance payments, orders and warranties.

Do not confuse an agreed exit fee with a contractual penalty. The former may be an agreed payment for the option to end the relationship; the latter arises from a breach of obligations. Their legal grounds and consequences differ, so they need separate lines in your calculations.

Clarify what happens to the initial franchise fee. There is no automatic refund simply because the business has not succeeded. Whether you can recover the money depends on the contract terms, the obligations actually performed and the circumstances of termination. Describing a fee as ‘non-refundable’ is no substitute for a legal assessment of the particular dispute either.

It is useful to calculate two scenarios: closing soon after launch and leaving after several years of trading. This will show which costs are fixed and which depend on the remaining contract term or the volume of purchases.

3. Agree what happens to stock, equipment and branding

Remaining stock does not disappear when the agreement ends. Before buying the franchise, establish whether the rights holder must buy back stock, may simply offer to do so, or has no involvement in selling off what remains. If there is a buy-back obligation, set out the required condition of the goods, the valuation procedure and the deadlines for handover and payment.

Do not rely on a verbal promise that ‘we’ll let you sell everything off’. Whether particular goods can be sold after the relationship ends depends, among other things, on whether they were lawfully placed on the market and on the contract terms. Having genuine goods does not, however, entitle you to keep presenting the outlet as an active member of the network.

Check who owns the equipment. Items you have bought, leased assets and equipment provided for temporary use will each require different arrangements. Establish in advance who pays for dismantling and transport, whether normal wear and tear is acceptable, and how returns will be documented.

A schedule to the agreement is a useful place to set out the sequence of steps: the last day for accepting orders, completion of customer services, a stocktake, removal of signage and return of assets. Confidentiality obligations may survive your exit; check their duration and scope in advance too.

4. Set out notice requirements and termination formalities

Even a withdrawal on valid grounds can lead to a dispute if notice is sent to the wrong address or delivery cannot be proved. Check the addresses, permitted delivery methods, the recipient’s authority and the rules for determining the date of receipt. Correspondence with a manager is not always a substitute for formal legal notice.

Under Article 1028 of the Russian Civil Code, it is the grant of the right to use a bundle of exclusive rights under a commercial concession that must be registered with Rospatent, Russia’s intellectual property office, rather than the agreement itself. Article 1037 requires registration of the early termination of a fixed-term agreement and the termination of an indefinite-term agreement. Specify who will prepare and submit the documents and pay the associated costs. Do not treat taking down the sign as a substitute for completing the termination formalities.

Before final settlement, make provision for reconciling outstanding balances, handing over assets and documenting the steps completed. If you sign a termination agreement, list any obligations that will remain in force and the deadlines for fulfilling them. Only use a blanket statement that ‘the parties have no claims against each other’ after checking the accounts and any potential claims.

Practical takeaway: before buying a franchise, obtain a clear exit plan with dates, documents and a budget. If the cost of ending the relationship cannot be worked out from the agreement, get the terms clarified before paying.