Franchise agreements in Sweden: planning for termination and transfer

When turning your existing business into a franchise network, it is easy to focus on getting started. But even your first franchise agreement needs to explain how the relationship can end or the business can be sold on. Clear rules protect both your business concept and the franchisee’s ability to plan their investment. Here is a practical way to prepare the exit terms before a lawyer drafts the agreement.

1. Distinguish between the contract term, termination on notice and termination for breach

Start by describing three different situations: the agreement expires, one party gives notice under its terms, or a serious breach leads to termination. These should not be treated as the same event.

Decide on a contract term that suits the investment and commitments involved in the business. A franchisee who needs to fit out premises and buy equipment must be able to assess how long they will be allowed to operate. Check how the franchise agreement’s term aligns with premises leases, equipment leases and other third-party contracts. These do not automatically end when the franchise relationship ends.

Prepare a briefing that answers the following questions:

• Does the agreement renew automatically, or is a new agreement required?
• When and how must notice be given?
• What terms will apply to any renewal?
• Which breaches could justify early termination?
• When should a party be given an opportunity to remedy a breach?

Avoid wording that suggests every minor departure from the agreement will lead to immediate termination. Let your lawyer assess which remedies are proportionate and legally sound. Also distinguish between urgent action to protect customers and the final termination of the agreement.

2. Plan for the possibility of a transfer

A franchisee may want to sell their business because of retirement, illness or changing personal plans. This need not be a failure for the franchise network. With a process in place, the business can continue under a new owner.

First, define what the agreement should cover: transfer of the franchise agreement itself, sale of the business’s assets, and changes in ownership of the franchisee’s company. A share sale may leave the contracting party unchanged while changing control of the company. Ownership changes therefore need to be addressed explicitly.

Next, set out the approval process. Explain what information the franchisor needs, which competence and funding requirements will be assessed, and how a response will be provided. Avoid making a vague promise that a transfer will always be possible, but equally avoid a process that leaves the seller waiting indefinitely for a decision.

Also decide whether the buyer will take over the existing agreement or enter into a new one. Explain any training requirements and potential costs. If you want a right to buy the business ahead of an external buyer, the procedure and valuation arrangements must be carefully drafted. Do not assume that any such right exists automatically.

3. Allocate responsibilities for closing down

Ending the relationship involves more than taking down the sign. Review what happens to every outstanding commitment and draw up a wind-down schedule that forms part of the agreement.

Start with customers. Who will handle prepaid orders, complaints, warranties and gift cards? The answer must reflect which business is the customer’s contracting party and which rules apply. An internal allocation of responsibilities must not be presented as removing customers’ statutory rights.

Then address the practical questions:

• When does the right to use the name, signage and branded materials end?
• How will stock, borrowed equipment and any buybacks be handled?
• Who will revoke access to shared systems?
• How will local accounts, telephone numbers and online booking channels be handled?
• When must final accounts be submitted and final payments made?

Customer data must not be treated as an asset that can be freely moved between businesses. Assess who is the data controller, the lawful basis for processing and the information requirements under the General Data Protection Regulation (GDPR). Also distinguish between data that should be deleted and records that must be retained under, for example, accounting rules.

4. Base the legal review on Swedish law

Sweden has specific legislation in the form of the Act (2006:484) on Franchisors’ Duty to Provide Information. It requires franchisors to provide clear, understandable information in writing well before the agreement is entered into. Among other things, this information must cover the contract term, conditions for amendment, renewal and termination, and the financial consequences of termination. Dispute resolution is also covered.

However, the Act does not provide a comprehensive set of rules governing how a franchise relationship may end. The Swedish Contracts Act and other relevant legislation also apply. Unreasonable contract terms may be modified or set aside under section 36 of the Contracts Act. Post-termination non-compete clauses require particular scrutiny under both contract law and Swedish and applicable EU competition law.

Ask your lawyer to review the exit terms alongside the disclosure material and schedules. Check that the documents set out consistent responsibilities and deadlines. Also decide how disputes will be handled: the choice between court proceedings and arbitration affects, among other things, the risk of incurring legal costs.

Practical takeaway: Test the terms against three scenarios: a planned sale, the agreement reaching its scheduled expiry date, and a serious breach of contract. If responsibilities, deadlines or costs are unclear, the draft documents need further work before signing.