All franchise agreements have different terms. What works well in one system may not be appropriate in another. The term and renewal provisions of the franchise agreement set forth the length of the relationship. There are advantages and drawbacks to an agreement of any length, which we will discuss here, along with some commonly asked questions.
What Is The Typical Length Of A Franchise Agreement?
The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee’s initial investment, though market conditions and the type of franchise can also be factors.
Insights On Agreements, Leases And Timing
Say you are the franchisee of a brick-and-mortar franchise. Your lease will ideally run concurrently with the franchise agreement. Otherwise, should the term of your franchise agreement end before your lease expires, you will find yourself still paying rent (and be contractually obligated to pay that rent) on space even though you no longer have the right to operate the franchise it once housed. Alternatively, if the lease ends before your franchise agreement, you will be obligated to operate a franchise for which you have no location.
Getting the timing right can be challenging. Assume, for example, that you sign a franchise agreement with a 10-year term. The franchise agreement is typically signed first, and then the franchisee scouts a commercial space to rent. But it can take months or even a year to sign a lease. A landlord may want a 10-year lease while you are already nearing the end of the first year on your franchise agreement.
The franchisor will ideally accommodate the request to extend your rights, but that may come with a cost. Franchisees will benefit from hiring a lawyer in this scenario to help communicate and negotiate with the franchisor and/or landlord. Otherwise, you will find yourself in a situation with a lease for a storefront but no right to operate your business.
What To Expect When Renewing Franchise Rights
If you intend to renew your franchise rights after the first term expires, you will likely be required to execute the franchisor’s new form of franchise agreement for the next term. This new agreement will likely have different terms, such as an increased royalty or new fees, and will change the regular expenses of your business.
Sometimes a franchisee will want to terminate the franchise relationship before the end of the term. While it may be a natural disaster or tragedy causing the franchisee to want to exit the business, the reasons could be purely economic, as well. For example, if the franchisee finds that mid-way through a 10-year term, the business is simply not generating the expected revenues he or she may want to close the business. Of course, if the franchisee wants to move or retire and the business is successful, the business could be sold, but even that carries costs.
Whatever the reason, it is important to review the franchise agreement prior to closing the franchise. Typically, the franchisee will not have a contractual right to terminate the agreement before the end of the term. In those situations, the franchisee may be required to pay liquidated damages or lost profits to the franchisor.
Contact Lusthaus Law
Franchisees should consult legal counsel before signing or renewing a franchise agreement or lease. The attorney will review the agreement, explain the franchisee’s risks and options and help to develop an appropriate exit strategy.
If you are considering buying, renewing or selling your franchise, contact Lusthaus Law to help you through the process, from beginning to end.