When a Franchisee Leaves the Network: What to Include in the Agreement

When an established business prepares to launch a franchise, discussions usually focus on opening new outlets. But the process for a partner’s exit should be developed before the first franchise is sold. For franchise networks, a clear process for ending the relationship helps protect customers, the brand’s reputation and both parties’ investments. Here is how to turn that process into workable contractual terms, rather than a list of threats to invoke if a dispute arises.

1. Distinguish between the grounds for ending the agreement

In Russia, arrangements granting a package of exclusive rights, including the right to use a trade mark or service mark, are governed by Chapter 54 of the Russian Civil Code on commercial concessions. An exit from the network therefore cannot be described simply as ‘the partner stops operating under the franchise’: the legal basis for ending the agreement must be specified.

Work through the following scenarios separately with a lawyer:

• expiry of the agreement without renewal;
• termination by mutual agreement;
• unilateral withdrawal where permitted by law and the agreement;
• termination by a court where the relevant grounds exist.

Each scenario requires its own documents, deadlines and consequences. A letter from a partner expressing a wish to close an outlet does not always, by itself, end the agreement or stop fees accruing.

Article 1037 of the Russian Civil Code allows either party to withdraw from an agreement with no fixed term by giving the other party six months’ notice, unless the agreement provides for a longer notice period. The same rule cannot automatically be applied to a fixed-term agreement.

Article 1037 also gives the rights holder grounds for withdrawal relating, for example, to breaches of quality requirements or payment obligations. Such withdrawal must follow the statutory procedure: a written demand to remedy the breach, a reasonable period to put it right, or a repeat breach within a year of the demand. Do not replace this procedure with wording such as ‘we may disconnect the partner at any time’.

2. Draw up an exit and notification timetable

Attach an exit procedure to the agreement. It should answer four questions: who is responsible, what must they do, by when, and how will completion be evidenced? Calculate deadlines from legally defined events, such as receipt of a notice, signature of a termination agreement or the date the franchise agreement ends.

Set out the sequence of actions:

1. The parties record the grounds for termination and the proposed termination date.
2. They appoint people responsible for final accounts, customers and removal of branding.
3. They reconcile outstanding obligations and draw up a list of unfinished orders.
4. Use of the rights granted under the agreement stops on the specified date.
5. The necessary paperwork and registration formalities are completed.

Under Article 1037 of the Russian Civil Code, early termination of a fixed-term commercial concession agreement and termination of an agreement with no fixed term are subject to state registration. Specify who will prepare and submit the documents to Rospatent, Russia’s intellectual property authority, pay the official fees and provide confirmation to the other party. An internal record of an outlet’s closure does not replace this procedure.

Separately agree how legally significant notices will be delivered. Instant messaging may be convenient for day-to-day discussions, but the parties should not be left arguing over whether a message constituted formal notice. Specify addresses, permitted electronic channels and the obligation to notify the other party of any changes.

3. Set the rules for final payments

Do not try to resolve every financial issue with a clause stating that ‘all sums paid are non-refundable’. The legal consequences depend on the grounds for termination, the terms of the agreement and what the parties have actually performed. If the rights holder has breached its obligations, this wording does not guarantee protection against claims from the partner.

Prepare a separate schedule of obligations for the final settlement. Include accrued royalties, outstanding payments for supplies, services paid for but not provided, the security deposit and agreed costs of winding down the relationship. For each item, state the basis for the amount, the supporting document and the payment deadline.

If royalties depend on turnover, specify the date of the final report and how subsequent refunds will be accounted for. Otherwise, disputed charges may remain after the outlet closes, with no way to verify them through the usual monthly reporting.

Agree in advance what will happen to equipment and stock. Buying a franchise does not, in itself, oblige the rights holder to buy back the partner’s assets. If a buyback is provided for, specify the required condition of the assets and the valuation and delivery arrangements. For remaining branded stock, check separately whether sales after termination are permitted and on what terms: there is no blanket permission for such a clearance sale.

4. Organise the removal of branding and arrangements for customers

List all the places where the partner uses the brand: signage, interiors, staff uniforms, packaging, the website, map listings, social media and advertising accounts. Specify what must happen to each: remove the brand name or logo, change the design, close the page or transfer control where there is a legal basis to do so.

Document completion with photographs, signed records and confirmation of changes to access permissions. Do not require the partner to destroy documents it is legally obliged to retain. Withdraw access to business systems according to an agreed plan, while preserving the ability to lawfully complete final payments and fulfil obligations.

Pay particular attention to prepaid orders, subscriptions, gift vouchers and warranty claims. Ending the agreement between the parties does not, in itself, end obligations to consumers. Decide who will inform customers, handle enquiries and fulfil orders that have already been paid for. Nor is the customer database transferred automatically: the processing and transfer of personal data must comply with Federal Law No. 152-FZ ‘On Personal Data’.

Test the draft exit procedure against a hypothetical scenario: a partner is closing down but still holds customer advance payments and stock, and its branded signage remains in place. If the team cannot allocate the necessary tasks without further negotiations, the document needs more work.

Practical takeaway: before recruiting your first franchisee, work with a lawyer to prepare not only the agreement, but also an exit timetable, a final reconciliation template and a checklist for removing branding. An orderly end to the relationship starts with clear arrangements at the outset.