Print PageFranchise Tutorial 16: Intro to Renewal Fees and Redesign Costs
When it comes time to renew your franchise agreement, there will typically be some costs in the form of a renewal fee and redesign or remodeling costs. You will want to plan for these costs and be prepared financially when it comes time to renew your franchise agreement for a new term.The costs of renewal will be defined in your franchise agreement. Costs will vary from zero to a few hundred dollars to a percentage of the current franchise fee or, potentially, to the amount of the initial franchise fee. How much the franchisor will charge reflects their attitudes and market conditions. A low fee that basically covers the administrative costs communicates that the franchisor values its franchisees and retaining these relationships. A high renewal fee communicates that the franchisor places a high value on the brand. They know that if you don't want to renew, they have other prospective franchisees that will gladly assume the franchise. The renewal fee represents the opportunity cost lost by not awarding it to someone else. With many franchisors the fee is typically somewhere in the middle, representing both of these attitudes. On average, the renewal fee is between $3,000 and $5,000, paid in full at the time of entering into a new franchise agreement for the renewal term.
It makes sense for the franchisor to encourage renewals and keep costs to renew low. The alternative is to spend a lot of time, effort and money on finding new franchisees, finding new locations and training the new franchisee. There is the potential loss of goodwill resulting from customers who had built relationships with the local franchisee operator, not to mention the strained relationships with remaining franchisees who see their fellow franchisees leaving the system.
Upon renewal, there will typically be a requirement to upgrade and/or modernize. This may include changes to the branding elements, equipment and technology and/or remodeling the physical premises of your location. This requirement is found in your franchise agreement. If your agreement has a longer term, it may require that changes be made during the term as well, not just at the time of renewal. Franchisors will provide a reasonable amount of time to make the changes, but will often not renew your agreement unless the changes are made.
Changes in the system are required in order for the brand to evolve, develop and remain competitive. Clauses requiring change allow the system to evolve, while maintaining uniformity and consistency over time. Franchisors will often involve the franchisees and allow them to provide input to the changes through a franchisee advisory council or committee. Examples of changes that might be required could be as simple as repainting the walls and replacing carpet with new colors. The colors that were in fashion in the '80s may look very out of date today. There may be strategic changes. Drive-ins were popular in the '50s, whereas today it is the drive-thru. Or there may be menu changes. Adding pizza to the menu would require pizza ovens and other modifications to the kitchen.
All of these changes are at a cost, ranging from a few hundred dollars, to hundreds of thousands of dollars. Some franchisors will offer financial assistance to facilitate these changes. Some franchise agreements will set a cap as to the cost of these changes, but it is very difficult for franchisors to forecast what the changes and the applicable costs will be five to 10 years into the future. As a result, the franchise agreement will speak of required upgrades in general terms.
Another cost that may be incurred at time of renewal is training to upgrade the franchisee and staff. If there is new equipment, your employees will need to be trained on the new equipment and processes. You will need to cover costs of your staff as they go through the training, as well as paying the travel, accommodation and meals for the trainer to come to you or, alternatively, for you to go to head office.
Before you renew your agreement, have a full understanding of what the total costs are going to be and ensure that you have access to the funds required. Your franchisor will assist you. You will want to ensure that you have sufficient time in the renewal term to get a return on your new investment. Successful franchisors will be sensitive to this fact, while at the same time balancing this against the need to keep the brand current and contemporary. It is in the best interests of the brand and the system as a whole.
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Posted Date: January 2011