Time flies. Wasn’t it only yesterday that you signed your original franchise agreement? But now it’s five, 10, 15, or 20 years later and it is time to renew…or not. Most franchise agreements include a renewal option, but unless you meet certain conditions, that renewal may not be automatic.
What conditions? That depends. Over time, you may have seen your franchise system evolve. So did the system’s franchise agreement. What this means to a franchisee, is that your renewal agreement – essentially a “new” contract – may require different obligations than your previous franchise agreement
1. When my franchise is up for renewal, what do I do first?
Decide whether or not you intend to renew and then notify your franchisor. Most agreements stipulate that you notify the franchisor of your interest to renew by a specific date – sometime in advance of your agreement’s expiration. Make sure that date is on your calendar and start your internal review process early to ensure you are:
- Still interested in renewing;
- Compliant with your obligations;
- Aware of what any renewal fee will be and that you are able to pay it;
- Willing to release the franchisor from any pre-renewal claims; and
- Willing to upgrade your franchise to the then-current model.
2. Is my franchise agreement automatically renewed?
Not usually. Many franchise agreements require the franchisee to comply with certain conditions before the franchisor will be required to renew the franchise. Assuming you are renewing, you or your attorney should begin your due diligence well in advance to prepare for any requirements you will be required to comply with in order to renew.
3. Is the franchisor’s renewal agreement final or can I negotiate?
Technically, nothing is written in stone. So, everything is negotiable – just like your original franchise agreement. You may even have extra leverage to negotiate certain provisions if you are a particularly successful franchisee or in a market of particular importance to the franchisor.
4. What if I do not want to renew my franchise? What are my options?
If you choose not to continue, one option is to let your franchise agreement run out. Or you may be able to sell your business either back to the franchisor or to a third party. You and your attorney would be well advised to reread your initial contract again, carefully – well in advance of the contract’s expiration – so you do not miss a crucial deadline – and to be aware of your post-expiration obligations. Typical obligations include the requirement to immediately stop using the franchisor’s trademarks and anything else that communicates your alignment with the franchise system, as well as to remove any relevant signage, branding, etc. This also includes business cards, social media, even special franchise-aligned phone numbers. Some franchisors may send a representative to inspect your de-identification processes.
5. When I leave the franchise, can I keep running my business?
Depends on your franchise agreement. Typically, your franchisor will not want you to operate or own a business that is competitive with your franchised business. Again, you and your attorney should check your agreement carefully for non-compete covenants which may preclude you from participating in any business that offers competing goods and services, often within a specific geographic area, for a period that typically extends from one to three years. Even if you open a non-competing business, you may be prohibited from soliciting former customers – especially if your franchise agreement stipulates that the franchisor, not you, owns your customer list.
These considerations can play a key role in your decision of whether or not to renew. Reviewing your agreement well in advance of your renewal date is critical to understanding potential exposures. Be knowledgeable. Or, contact me, Julie Lusthaus at email@example.com, with questions and let’s talk.