Franchisees have lots on their minds. Just maintaining a reliable staff and generating a profit is enough to keep an operator occupied. Understandably, most franchisees do not have the renewal process on their radar over the course of a standard agreement.
But that renewal date needs to be noted if they want to remain in – or leave – the franchise system without forfeiting their rights or violating any agreement. Franchisees will gain a better perspective on their renewals with these four tips:
Tip 1. Bust Out The Calendar
Most franchise agreements have an express provision which dictates the timing of when franchisees must give notice to the franchisor that they want to renew their franchise. That period is usually about 12 months before the end of the initial term.
Franchisees reading this right now should review their franchise agreements to determine the applicable notice period and mark their calendars to ensure that they will receive a timely reminder before the expiration of their franchise agreement. Who cares if that date is years from now? There is too much at stake to risk missing the notice deadline. Franchisees should not assume that the franchisor will remind them of the steps required to renew.
Tip 2. Review The Renewal With A Franchise Lawyer
On renewal, the franchisee will likely be required to execute the franchisor’s new form of franchise agreement for the next term. Franchisees should not be too hasty when it comes to signing the renewal agreement. Such agreements often look different than the initial contract from 10 years earlier. For example, the new agreement may have higher fees including an increased royalty, and new fees which would increase the franchisee’s ongoing business expenses for the business.
An attorney can assist to:
- Ensure that the differences between the agreements (and resulting impact on business operations) are clear to the franchisee;
- Negotiate certain provisions where possible; and
- Ensure that the franchisee does not lose any rights from the prior agreement, which may be applicable to the renewal term.
Tip 3. The Franchisor May Not Negotiate
Some franchisors may not be willing to negotiate any of the terms of the renewal agreement in an effort to keep their franchise agreements uniform. Uniform franchise agreements make it easier for the franchisor to manage enforcement. A franchisor may refuse to negotiate simply to keep other franchisees from becoming resentful if they did not negotiate as favorable a deal as yours. Ultimately, however, as is always the case, you will not know unless you ask.
Tip 4. No Renewal? Know Where and When You Can Go
If a franchisee is not seeking to renew (or no longer has rights to renew), there may be contractual limitations on the franchisee’s ability to remain in operations even under a different name.
Say you operated a sandwich franchise but did not renew. You likely signed a non-compete clause in the initial agreement that contractually limits your ability to continue operating a sandwich shop under a different name.
Changing the name of your business and continuing to operate, whether as a sandwich shop or another type of food establishment, could put you in violation of the original agreement resulting in litigation with the franchisor and tarnishing your reputation. Furthermore, a franchisor may have the right to take over your lease. These scenarios have happened and they are just some of many to discuss with your lawyer.
Contact Lusthaus Law
Just as it is important to have a lawyer review the Franchise Disclosure Document (FDD) and initial franchise agreement (FA) before joining a franchise system, franchisees should consult legal counsel before renewing a franchise and signing a renewal agreement or lease. Strategize and consider these questions:
- Do you want to renew within the franchise system?
- If so, for how long? And what rights can you retain?
- If not or if you do not have a right to renew, what is your exit strategy?