In franchising, it is always better to be ahead of the game. This is especially so for franchisees, who are not provided with an unlimited right to operate their businesses.
Let’s discuss what franchisees need to know about renewing their franchise agreement and how collaborating now with a NY franchise lawyer will help you make an informed decision on renewing in 2024.
Check Your Calendar
Most franchise agreements have a term of five or 10 years, depending on the industry in which the franchise is operating. If your franchise agreement was signed in 2014 or 2019 – which could seem like yesterday or eons ago – it may be time to consider whether to renew.
It is important to note that franchise agreements generally do not renew automatically, and the onus is often on the franchisee to initiate the renewal process. Most franchise agreements contain a provision that outlines the steps needed for renewal, including the requirement that the franchisee provide the franchisor with notice of its intent to renew within a certain time frame. While each agreement is different, the notice required is often not more than 12 months nor less than six months prior to expiration.
Once you establish the date by which you must provide the franchisor notice of your intent to renew, mark the date on your digital calendar.
Intent to Renew
As the time to renew approaches, franchisees should reflect on past operations and note what went right and what went wrong. This can help inform on whether the franchisee will want to remain in the franchise system and maintain the relationship with the franchisor.
Assuming your business is successful and you want to continue operating under the brand, contact your NY franchise lawyer to begin your due diligence well in advance and prepare for the renewal process.
Renewal ≠ Extension
In addition to not being automatic, “renewal” typically does not mean extending your current franchise agreement for an additional period of time. Rather, you will have to sign the franchisor’s new form of the franchise agreement, which will likely be more onerous than your extant agreement. This could mean an increased royalty and new or other increased fees, a change in mandatory operating equipment, and/or a change in territory protections. Franchisors often modify their agreements over time and when the franchisee is eligible to renew, the new agreement may contain significantly higher fees or new operating procedures.
A thorough comparison of your extant agreement and the renewal agreement will help you understand what changes to operations you will face if you choose to renew.
Neither federal nor state franchise laws prohibit franchisors from negotiating franchise agreements with franchisees, whether it is your first agreement or a renewal. When the franchisor’s representative says it is against the law to negotiate, confidently know that is not true. But, whether your franchisor will negotiate and to what extent, depends on many factors.
Is It Time To Sell?
Alternatively, you may want to sell your business to the franchisor, another franchisee, or perhaps a new buyer. In such an event, it is wise to have franchise counsel review your agreement to determine the transfer process so that you can ensure that you do not lose the right to sell by allowing your franchise agreement to expire.
Of course, allowing the franchise agreement to expire is an option in lieu of renewal. However, in such an event, you may not be permitted to continue operating your business (even under a different name) and will likely lose whatever value you have built in your business.
Your franchise attorney can help you review your existing agreement in advance of its expiration to determine 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, and even special franchise-aligned phone numbers. Some franchisors may send a representative to inspect your de-identification processes.
As you look to the future, also remember that your original agreement may have stipulations preventing you from owning or operating a competitive business for a period of time. This is a key detail – among several others – you and your franchise lawyer must identify during the renewal or expiration process.
How Lusthaus Law Can Help
Never assume that the renewal agreement will be a copy of the previous one, with a new date at the signature line. Working with knowledgeable franchise counsel during the renewal process can help protect your rights and interests during the next term of franchise operations.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path toward your franchise’s successful future.