Franchise agreements don’t last forever. So, anyone who enters into a contract as either a franchisor or a franchisee must understand their franchise renewal rights if they want to avoid unexpected problems later on. In this article, we run through the process of renewing a franchise contract.
Although franchise agreements can last up to a quarter of a century, they tend to cover periods of around five years. But no matter the length of your contract term, it’s wise to consider your final exit strategy before you even join a franchise.
To make sure you get the best outcome for you and your business, you need to understand your franchise renewal rights from the get-go. Keep reading to find out more about the concept.
Why you might need to renew the franchise agreement
It can be complicated to terminate any sort of agreement if it has an automatic renewal clause, so franchise agreements almost always have a specified ‘end date’.
Usually, franchisees must meet certain conditions in order to qualify for franchise renewal, but franchisors shouldn’t request a termination unless the investor has breached an element of their contract.
How many times you should renew the franchise agreement
Many franchisees stay in their business for one or two decades. Usually, 10-20 years provides enough time for investors to establish their unit, grow in their territory, develop a loyal customer pool and set up additional branches if they want to.
So, a franchisee with a five-year franchise agreement might renew it two or three times, while someone with a 10- 20- or 25-year contract would likely refresh it just once, if at all.
How to renew your franchise agreement
If a franchisee adheres to the conditions in their agreement and performs well throughout their contract term, the franchisor is usually happy to renew it. However, the franchisee doesn’t have automatic franchise renewal rights.
Ideally, the franchisor and franchisee should meet well in advance of the contract expiry date to discuss a potential renewal. This meeting is the franchisor’s opportunity to discuss any additions or alterations to the contract, such as property refurbishments or pricing changes. Equally, the franchisee could raise their own suggestions or concerns, but the franchisor has no obligation to negotiate.
Even though both parties will have been bound by the agreement for some time, it’s a good idea to consult a specialist franchise solicitor before renewing it. If there’s room to negotiate some of the terms, a legal professional should be able to provide valuable guidance.
In the majority of cases, the franchisee pays the franchisor a renewal fee if they decide to continue working together. If a franchisee exits the franchise, they must stop trading under the brand. And if they don’t close or sell their business, they must change any signage, hand back the operations manual, uniforms and equipment, and cover the costs of these changes.
Some franchisors also include a clause in the contract prohibiting franchisees from launching or operating or operating a ‘competitor’ business for a certain number of years after leaving the franchise.
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Franchise renewal rights...
1. ...if the franchisee doesn’t want to renew the franchise agreement
If a franchisee chooses to walk away from their contract at the end of the agreement term, there may be some exit conditions to fulfil before leaving. Usually, franchisees must notify the franchisor of their decision six months before the contract’s expiry date.
2. ...if the franchisor doesn’t want to renew the franchise agreement
In a franchise relationship, the franchisor has the upper hand, and there are many reasons why they might want to terminate a contract or decline a franchise renewal application. For example, the franchisee may have failed to pay their fees or achieve minimum performance standards.
If the issue(s) constitute a breach of contract, the franchisor is within their rights to turn down a franchise renewal and even introduce financial penalties to recover any debts.
3. ...if the franchisee wants to sell their franchise unit
Franchise resales can involve a lengthy, complicated process, so planning is key. Getting everything in order ahead of time should help the franchisee secure the best possible sale price by improving any problem areas before they value their unit.
The franchisee should tell their franchisor as soon as possible if they want to sell their unit.
Ultimately, there are three main ways to secure a buyer:
- The franchisor selects a franchisee, business partner or prospective investor who has registered an interest in the unit - the seller may have to pay a fee if this happens
- The franchisee puts forward one of their employees who is interested in taking on the unit
- Both parties find a buyer through an advertising campaign, online directory, broker, industry event or conference
The franchisor gets the final say on who can buy the franchise unit - even if the franchisee finds a suitable candidate.
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Understanding franchise renewal rights
Hopefully, this guide has given you an understanding of how to renew your franchise agreement, but you can find more specific advice in our other franchise articles.
If you’re a franchisee, learn the steps you should take to protect your business during the renewal process or how to succeed in planning a smart and seamless exit strategy. You might also be interested in finding more information on how and when you can sell your franchise unit.
For franchisors, our guide to the six legal issues of franchise resales should help ease the process.
These are just a few of our handy franchise guides - you can find far more in our article section. Take a look to browse our most recent publications, informed by the latest statistics and industry trends, or stay up to date with our daily news stories.
Alice Tuffery, Point Franchise ©