Franchise Tutorial 15: Intro to Term Of Agreement And Renewals

All franchise agreements have a fixed term. They come to an end. That is the nature of a licensing relationship. A licence has a beginning and an end. You are not buying the right to use the brand but instead leasing it, like the lease of a commercial space. At the end of the term you have the ability to renew the agreement for a further term, or you can end the relationship.

The length of the term will vary. Often the term is five or 10 years and sometimes as long as 15 to 20 years. The length of the term is outlined in the franchise agreement. It will often coincide with the length of your lease. The length is dependent upon the total investment amount. If you have invested over $1 million, you will typically require a longer term than, say, if you invested $100,000. The term should be long enough to pay off your business loans and get a return on your investment.

At the end of the term you typically have an option to renew. The option is usually your choice, provided that you meet the renewal conditions. Such conditions might include;

You are in good standing and in compliance under the terms of the existing franchise agreement
You have notified the franchisor of your desire to renew (typically 6 months prior to the end of the term)
You sign a current franchise agreement, which may or may not have terms and conditions that are substantially different from the original agreement
You pay a renewal fee
You upgrade your location and equipment to the current standards, specifications and/or image
You have secured a lease on the location
You and your staff complete renewal training
You sign a general release regarding the expiring license agreement

Be sure to give the appropriate notice of your desire to renew. If you forget and miss the deadline the franchisor may assume that you are not intending to renew and find another franchisee to take over the location at the end of your term.

The length of the renewal term is often the same as the original term, but sometimes is shorter. Some franchises allow unlimited renewals, while other franchises only permit one renewal term. Each franchise is different and you need to read the terms of your franchise agreement to get clarity.

Upon renewal, be aware that the new franchise agreement may be substantially different from the original. The franchisor may increase the royalty or other financial commitments, thus changing the financial returns of the business. This is common if it was a new franchisor and you were one of the first franchisees. For established franchisors, however, the financial terms typically remain the same and instead the revisions in the agreement reflect changes in law to more fully protect franchisor and system-wide interests. There may also be changes to reflect new technology or adjustments to territories to reflect changes in population and demographics.

As part of the renewal process, you may be provided with a disclosure document if you are located in Ontario, Alberta, P.E.I. or New Brunswick. Provincial regulations in general state that a renewal is exempt from requiring disclosure if there has been no interruption in the operation of the business, unless there has been a material change. The fact that you are being required to sign a new franchise agreement that may be different could be considered a material change. Franchisors are wise to lean on the side of caution and provide full disclosure.

If you choose not to renew the franchise agreement the franchisor has the right to issue the franchise to someone else. You would be giving up your rights to use the brand and operating system of the franchise. Most franchise agreements have a non-competition clause that would prevent you from continuing to operate the same business independently. You would have to go into another line of business, but, after 10 years, you may be ready for a change. In many cases, however, if you are looking for an exit strategy, you would be better off financially to renew the franchise agreement and sell the franchise assets to a new party and transfer the licence. This allows you to get a greater return on your investment or, in some cases, minimize your losses.

Be sure to read and fully understand your franchise agreement with regards to the term and renewal. Have a franchise lawyer review the new agreement and assist you in getting clarity as to your new obligations, which may be substantially different from the ones you had. A good understanding of the terms of your new franchise agreement will allow you to better plan your business and your personal future.

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Posted Date: January 2011