How to make sure you can renew your franchise agreement
Nearly all franchise agreements are for fixed terms. This common aspect of franchising is often taken for granted by the excited franchisee going into a new business venture.
Some franchise agreements only provide for a fixed initial term with no right of renewal. Others provide for a fixed initial term with one or more rights or options to renew. The renewal of a franchise agreement is not a given.
In the case of fixed term franchise agreements with no options to renew, the franchisee will essentially be at the mercy of the franchisor at the expiry of the initial term. The franchisor will be under no obligation to renew the franchise agreement.
That said, even in the case where the franchisee has an option to renew, renewal of the franchise agreement is not guaranteed. Most franchise agreements specify requirements that the franchisee must meet in order for its franchise agreement to be renewed. These ,include:
- exercising the option within a specific timeframe (e.g, between six months and three months before the expiry date);
- payment of a renewal fee.
- possible upgrade of the business premises;
- the remedy of any breaches of the franchise agreement;
- signing a new franchise agreement. In most cases the franchisee is required to sign the franchisor's franchise agreement current at the time of the renewal. This agreement may contain different terms, including different financial terms. If the financial terms of the new franchise agreement are more onerous, the business may be less profitable and worth less if the franchisee wants to sell.
What can franchisees do to ensure renewal?
1. Attempt to negotiate one or more options to renew the franchise agreement.
2. Where the franchise agreement contains an option or options to renew, take a note of the option dates to minimise the risk that the dates may be missed and any right to renew lost.
3. Comply with the terms of the franchise agreement during the initial term.
4. Not leave the renewal process to the last minute. Franchisees should start discussions with the franchisor early. If the discussions start early the decision to renew or not renew can be made well before the expiry date of the franchise agreement and avoid the uncertainty and lack of security created for both parties when a franchise agreement expires with no agreement having been reached.
Franchisees must always remember they do not own the brand and systems - they are only given permission to use the brand and systems for a period of time. When the franchise agreement comes to an end, they can no longer use the brand and the systems.
Situations can arise where a franchisee, through hard work, effort and toil, can build up a business worth many times the initial outlay, only to face the possibility of that value evaporating when the franchise agreement comes to an end and is not renewed.At that point, the franchisee's only assets are the tangible assets used in the business, such as the plant and equipment.
It is important that franchisees seek appropriate legal advice to ensure they are aware of the rights they are granted under the franchise agreement and accounting advice to ensure the duration of the franchise agreement gives them sufficient time to make a return on their investment.