Will My Franchise Agreement Be Automatically Renewed?

26/02/2018 08:00 | Start a business

Are franchise agreements automatically renewed?

Under normal circumstances, itís standard practice for a franchise contract to be renewed, especially if it has a shorter than average term. However, many franchisors have different renewal procedures, and some will have specific requirements which must be adhered to before the original agreement expires. Therefore, itís important to know where you stand so you donít get caught out when you attempt to renew your franchise contract.

What the British Franchise Association (bfa) states about franchise renewal

The bfa, which sets strict criteria for franchisors and the franchise industry's advisors, states in its Franchising Code of Ethics that one of the minimum essential terms of a franchise agreement should include the basis for any renewal of that agreement.

The bfa's view is that the franchise agreement should be allowed to continue, as long as a number of conditions are met. These include the payment of the renewal fee, ensuring the franchisee fulfils their contractual obligations and that there are no material breaches, and that the franchisee complies with the terms of renewal.

Unless there have been contractual breaches, the contract should continue.

As long as the franchisee has not breached any of the conditions for renewal, it is reasonable to expect that the contract will continue. Indeed, the bfa states that the franchisor will have an obligation to provide a renewal if the franchisee has met all the conditions of the franchise agreement. Therefore, an initial five-year term should be followed by another five-year term, which will enable the franchisee to continue growing the business and raising its value to ensure a maximum return on the original franchise investment.

A franchisor will have little incentive not to renew a contract if the franchisee's business has been successful and the company has acquired a significant, sustainable customer base. Indeed, for systems with percentage-based royalty fees, the franchisor will earn more money when the franchise does well, so it would make sense to renew the contract so that both parties can continue to benefit financially.

Check whether there are any renewal fees.

Many franchisors will charge a renewal fee which should be specified in the franchise agreement. This may vary depending on your industry and the size of your franchise and could include a clause that permits the franchisor to increase their royalty fee afterwards, depending on how your business has performed.

Check whether you can negotiate a lower franchise fee.

Contract renewal is an excellent opportunity to negotiate with your franchisor and request a reduction of your franchisee fee. Although it might seem highly unlikely that any franchisor would willingly negotiate a lower fee in the franchise contract, this may be considered if your business has been particularly successful. For example, if you put your franchise up for resale and the new franchisee was not nearly as successful, the franchisor could end up losing money, even if they charge a higher fee to the new franchisee. A pragmatic franchisor will weigh up the pros and cons but will be eager to keep great talent in the network for as long as possible.

As a general guide, the bfa states that the average ongoing franchise fee is 11.7% of total sales, although this only applies to franchisors that charge a percentage fee as opposed to a fixed one.

Keep a record of the deadline for applying for a renewal.

Some franchisors will impose strict deadlines for applying for a franchise contract renewal, so make sure they receive your application as early as possible. Itís a good idea to make a note of this date in your calendar, so you don't accidentally miss the deadline, especially if your franchise contract is very long (i.e. 10 or more years).

If the current franchise agreement lasts at least six months, you'll need to provide at least six months' notice of your intention to renew the agreement. Other dates you'll need to be aware of are the opening date, franchisee fee payment dates, insurance policy expiration and renewal dates, client contracts, and the dates of your data protection policies (as laws may be subject to change).

Does the franchisor have any other requirements for renewing the agreement?

Your franchise agreement may require you to refurbish/upgrade your premises before the contract can be renewed, so make sure you understand your obligations and how much this will cost. This may include a requirement to repaint the premises and repair any defects that have appeared during the course of the franchise term.

Determine how much longer you want to run the franchise

Make sure youíre comfortable committing to a new franchise term. For example, if youíre renewing a 10-year contract but intend to sell the business during the term, youíll be exposing yourself to a degree of risk. Thereís no guarantee that youíll be able to sell the franchise at a higher price than your original franchise investment, as market conditions may become less favourable if there is an economic downturn or the franchise model faces extra competition.

What happens if neither party wishes to renew the agreement?

In this situation, the bfa advises that either party may provide notice of their intention to terminate the agreement, provided they follow the terms of the contract. However, if no such notice is given, the contract will remain valid, just as a tenancy agreement would remain valid unless either the tenant or landlord provides notice to terminate the contract.

As always, make sure you seek professional advice

Because the franchise sector in the UK is not subject to any specific laws, it can often be challenging to interpret franchise agreements and know where you stand regarding your rights and obligations. That's why it always pays to talk to a solicitor who can guide you through your contract and alleviate any concerns you may have about your franchise investment and the terms of your renewal. For the best advice, visit the bfa website, where you can see a full list of bfa-approved solicitors, all of whom have expertise in franchise law.

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