By Chad Finkelstein
As a prospective franchisee, you probably have a lot of immediate concerns on your mind—finding a franchise system, scouting a location and getting the money together for your venture, to name a few. However, you must also pay attention to those issues that will arise years down the road—namely, what you will do once your initial agreement with your franchisor comes to an end.
Like most commercial documents, franchise agreements have an initial term or duration, following which you and your franchisor decide whether you would like to continue your relationship. As a prospective franchisee, it is important to review your franchise agreement carefully (as well as the disclosure document, which summarizes these relevant provisions) to ensure you are fully aware of what your rights, obligations and responsibilities will be in order to exercise your various options. (It is equally important for you to understand the grounds under which the franchisor may terminate the franchise relationship, though this is a topic for another article.)
Unless a separate arrangement is struck between you and your franchisor, particular sections of the franchise agreement will govern the renewal or transfer of a franchise—or what happens if your franchisor decides you have run your course in its system. This article will provide some insight into some of the conditions, challenges and opportunities you may be presented with as you consider your renewal options.
Option 1: Renewal
The initial term of a franchise agreement will establish the duration of the contract between you and your franchisor. As a prospective franchisee, you should ensure this term is long enough to give you the opportunity to recoup your initial investment and turn a profit before possibly exiting the system. While franchisors will almost certainly want to give you this opportunity (after all, a successful franchisee benefits everybody), they will not necessarily want the term to be so long that they become stuck working with a frustrating franchisee with no recourse except termination for cause.
Accordingly, the renewal provisions of a franchise agreement are exceptionally important as they will set the terms and conditions, if any, under which you may be permitted to renew your agreement and continue operating within the system. The initial and renewal terms of franchise agreements vary by company and industry, but you can typically expect the renewal term (or terms, as the case may be) to be shorter than the initial term. For instance, a franchise agreement may provide for an initial term of 10 years, with one or two options to renew for five years each.
Generally, so long as you have satisfied the franchisor’s conditions, the exercise of a renewal option will be yours. The following are some common conditions you can expect your franchisor to include in your franchise agreement with respect to granting the renewal of your franchised business for another term:
Compliance with franchise standards
You will need to have complied with the terms of the franchise agreement, including any performance criteria and operating standards imposed by the franchisor. You also cannot be in default of the agreement at the time of renewal.