What is a franchise term and how long does it go for?
Buy a franchise and you’ll be signing up to operate a business for a set period. How does it work?
A franchise agreement is a binding contract that commonly has an expiry date. While there may be the choice to sell early, or to renew the agreement for a second term, any business plan and financial strategy should be based on the period of the franchise agreement.
Ideally the term stipulated in the agreement will be a long enough period for you to have made a profit from the exercise - recoup your initial investment, repay any loans associated with the initial purchase of the franchise, and receive a profit.
Typically a franchise term lasts from three- to five-years, with an option to renew the agreement for a second or even third term
If the franchise operation requires premises, it is best to align the franchise and lease agreements.
How to renew an agreement
The Franchising Code of Conduct governs the process of franchise term renewals.
Under the regulations, the franchisor is compelled to supply disclosure information as part of the renewal process. It’s wise to seek legal advice, even though the franchisor and agreement are familiar, because franchisors can make amendments to the agreement and it is crucial to understand any proposed changes.
Franchisors may charge a renewal fee and demand the business premises are refurbished as the part of the contractual obligations.
What the franchisor can do
The franchisor can terminate a franchise agreement, but only under strict guidelines set out in the Franchising Code of Conduct.
This means franchises must have significantly breached the franchise agreement or Code.
The franchisor can choose to refuse to grant a second term of the franchise agreement when the time comes to consider renewal, but again, clauses in the Code restrict the circumstances in which this can take place.
What the franchisee can do
The Franchising Code of Conduct allows for a seven-day cooling-off period, which means a franchisee can pull out of the franchise agreement almost immediately after signing it or paying non-refundable amounts.
A franchisee may also choose to sell the business before the end of the term. It is likely the agreement will specify certain restrictions on a sale - it is common for the franchisee to require the franchisor’s approval of the incoming franchise buyer before a sale can go ahead.
If the lease ends earlier than the franchise agreement, for whatever reason, and replacement premises or new franchisee cannot be found, terminating the lease by mutual agreement is an option.
In all cases expert franchise lawyers can provide important advice on the content and process of renewal or sale of the business.