Buying a franchise: assess the cost of leaving the agreement

When you buy a franchise, you join a network with a shared brand, operating methods and support. But before you commit, you need to know how the relationship can end. The exit terms affect both the value of your investment and your financial risk. Here is a method for assessing what leaving could involve, before you sign.

1. Ask about the end from the outset

Sweden’s Act (2006:484) on Franchisors’ Duty to Provide Information requires franchisors to provide clear, understandable written information well before the agreement is entered into. This must explain the implications of the agreement and any other matters that need to be disclosed in the circumstances.

The information must cover, among other things, the agreement’s duration, the conditions for amendment, renewal and termination, and the financial consequences of termination. Non-compete restrictions, dispute resolution rules and responsibility for costs must also be described. These are matters you should be able to assess before buying, rather than discover when you want to leave.

The Act does not specify a fixed notice period in days for providing this information. Ask for the documents early enough to give you and your advisers time to review them and ask follow-up questions without pressure.

Sweden has no comprehensive franchise law governing every aspect of the relationship. Other legislation, including Swedish contract and competition law, may also apply. The disclosure requirement does not, in itself, give you the right to leave the agreement whenever you wish or recover your investment.

Request a complete set of documents: the draft agreement, relevant schedules, any terms incorporated by reference and the written pre-contract information. Highlight every provision governing what happens when the agreement ends. If a document referred to in the agreement is missing, your review is not yet complete.

2. Distinguish between expiry, termination and sale

The agreement reaching the end of its term is not the same as having the right to end the relationship early. Selling the business is a third situation, which may require the franchisor’s approval under the agreement.

Draw up a simple timeline and check the following:

• Expiry at the end of the term: When does the agreement end, and must you give notice to prevent automatic renewal?
• Early exit: Does the agreement allow you to leave without being in breach? What conditions and costs apply?
• Breach of contract: Which breaches can lead to termination, and is the party concerned given time to remedy them?
• Transfer: Can you sell the business or the shares in your company, and what approvals are required?
• Renewal: Do you keep the existing terms, or must you accept a new agreement, new fees or refurbishment requirements?

For a transfer, ask how a prospective buyer is assessed, who pays any transfer fee and whether the new owner must sign a new franchise agreement. Also ask whether the franchisor has a right of first refusal and, if so, how the price is determined.

Do not assume that a profitable business will automatically be easy to sell. The buyer’s ability to remain within the franchise network affects the business’s value. Ask a solicitor specialising in franchising to assess terms that are unclear or give one party considerable scope for interpretation.

3. Calculate the obligations that may remain

The end of the franchise agreement does not automatically end premises leases, loans, equipment leases or employment contracts. Your review therefore needs to cover all significant commitments, not just fees payable to the franchisor.

Create a table with four columns: obligation, possible end date, estimated cost and who is responsible. Include, for example:

• premises rent and any costs of reinstating the premises,
• equipment leases and payments for IT systems and services,
• stock that cannot be returned or sold without the brand,
• removal of signage and other branding,
• employment-related costs that need to be assessed under employment law,
• loans and personal guarantees.

For each item, distinguish between a definite contractual cost and an estimate. Do not assume, for example, that the franchisor will buy back stock or equipment. Check whether there is an obligation to do so, how the items would be valued and when payment would be made.

Then calculate the costs of three possible scenarios: expiry at the end of the term, an approved sale and an early exit following weak sales. The aim is not to predict the future, but to understand how much funding you might need when revenue falls or stops.

If you have given a personal guarantee, pay particular attention to what is required for you to be released from it. Selling the business or ending the franchise relationship does not necessarily bring the guarantee to an end.

4. Protect your options before signing

A post-termination non-compete clause may restrict the work you can do, where you can do it and for how long. Such terms need to be assessed against both the agreement’s wording and the applicable rules, including competition law. Seek legal advice rather than assuming that the restriction is always enforceable or can always be ignored.

Check the dispute resolution provisions too. Arbitration and court proceedings involve different costs and procedures. Understand what the agreement says about where and how disputes will be heard, and who bears the costs, before a dispute arises.

Then discuss specific changes: clear transfer criteria, deadlines for decisions, arrangements for stock and equipment, and responsibility for winding down the operation. Make sure any agreed changes are recorded in the agreement or a binding schedule; do not settle for verbal assurances.

Practical takeaway: Do not buy only the opportunity to start. Check your options for leaving too. Sign only when you understand the deadlines, the obligations that will remain and how an exit would be funded.