Do You Know Your Rights When It Comes To Your Franchise Renewal?

04/05/2018 08:00 | Start a business

Your rights during franchise renewals

As with all good things, there will be a point when your franchise agreement comes to an end. When you initially signed your franchise contract the term will have been set for an agreed period. This could be anywhere from three to 25 years, but generally, they last for five years. It doesnt matter how long your contract was agreed for, what counts is that you know what happens when your franchise agreement does come to an end.

How do you go about renewing your franchise agreement?

Let's start with the basics. If you've performed well during the term of your contract, the chances are that you'll be invited to renew, but this isn't a given. Your franchisor has the right not to renew your contract.

But all being well if you decide to continue running your franchise, and your franchisor is happy with your performance, there should be no problem continuing with the renewal. This doesnt happen automatically though, and you'll have to meet with your franchisor well in advance of the expiry date to discuss any new terms.

This is the chance for your franchisor to specify some additional conditions for your contract. These could include requirements such as a refurbishment or literature upgrades. In the majority of cases, youll also be expected to pay a renewal fee too.

Even though you will have been operating your franchise for some time, it's still vital that you consult a specialist franchise solicitor before you sign your renewal agreement. Just as with your first franchise contract, there is room to negotiate some of the terms and a solicitor that has experience of franchising is best placed to advise you at this time.

What happens if you decide not to renew your franchise agreement?

Of course, you may decide that you dont want to renew your franchise agreement but unlike a traditional 9 5 job, you cant just walk away from a franchise. There will be exit conditions in your franchise contract which youre legally obliged to fulfil.

Youll need to give the franchisor at least six months notice that youre not going to renew the agreement. Then, from the contract end date, you must stop trading under the franchise brand. Not only this but you must entirely separate your business from the franchise. This means changing any signage, branded literature and handing back the operations manual, uniforms and any other equipment or documentation that is related to the franchise. You will be responsible for covering the cost of these changes to your business.

However, there may be a condition in your franchise agreement that states that youre prohibited from owning or operating a business that is in direct competition with your former franchisor for a specific period. You must ensure that you look out for such conditions, or post-termination restrictive covenants when youre signing your original contract. These covenants are legally enforceable and could see you having to cease trading altogether when you leave the franchise.

What if the franchisor declines to renew my contract?

In a franchise relationship, the franchisor has the upper hand. There are as many as 20 reasons why a franchisor can decline a request to renew a franchise contract. These reasons can include non-payment of fees and failure to achieve minimum performance standards. The franchisor would deem these as breaches and are therefore within their rights not to agree to renewal terms.

What if I want to sell the franchise during the franchise term?

Selling a franchise can take a considerable amount of time to complete. Therefore, the key to successfully selling a franchise is in the planning. Putting arrangements in place for your exit well in advance will give you plenty of time to identify any areas of weakness within the business and fix them so that they dont affect the value of your franchise.

Unsurprisingly, the franchisor gets the final say as to who can buy your franchise. So even if you find a suitable buyer, the franchisor will assess whether they are a suitable candidate to take over your business.

Ensure that you inform your franchisor as soon as you decide to you want to sell up. They may have been contacted by prospective franchisees that are interested in starting a franchise in your territory and so could be ideally placed to buy your business. If a buyer is found this way, then the franchisor may charge you for the privilege.

Is there a maximum number of times a franchise agreement can be renewed?

Your franchise agreement will always have an end date. The reason that franchisors dont offer continuous contracts is that it can be complicated to terminate an agreement with an automatic renewal clause. Renewal clauses include specific conditions that must be met before renewal rights are granted. If the contract is due to renew anyway automatically, it can be tough to end the contract of a poor performing or non-compliant franchisee.

Typically, a franchise agreement with an average term of five years would be expected to be renewed twice. For a medium-term contract of say ten years, there would tend to be one renewal, and for much longer terms of 20 to 25 years, only one renewal would be likely.

How your franchise contract ends is as important as how it begins. There are many things that you need to consider months, if not years before your franchise agreement reaches the end of its term. This is especially the case if youre thinking of selling a franchise.

Be prepared, inform your franchisor as soon as you decide the future of your franchise, and have a robust exit plan in place. Also, remember to consult the relevant legal and financial professionals to offer you advice and guidance as you prepare for the next stage of your franchising journey.

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