bannerGrowing a Franchise

Top Insights for Franchisees to Successfully Navigate the Franchise Renewal Process

The decision to renew a franchise agreement is an important one. Here are five things you should consider to make the best choice for you.

The execution of a franchise agreement comes with a set of requirements, an understanding of the support a franchisor will provide and a term — often five, 10 or 20 years. Generally, assuming they are in good standing with franchise regulations, franchisees are allowed to decide whether they will be renewing their franchise agreement at the end of the term. Occasionally, the choice to renew is up to both the franchisee and franchisor. 

Either way, as the franchisee, being informed is key. Here are some key insights to keep in mind as you navigate the renewal process.

Don’t Let a Renewal Catch You off Guard

When running a business, it can be easy to focus all of your attention on just that. Franchisees should take note of their agreement term and keep the end date in mind. The original franchise agreement should include information about a renewal timeline, including how much notice the franchisor requires. This can be months before the original agreement officially expires, and you don’t want to miss this date and unintentionally limit your options to move forward.

Noting a renewal on the horizon gives you time to do the necessary research, consult a lawyer and speak with family or business partners about next steps without the pressure of a time crunch.

“A franchisee should be thinking about renewal long before the expiration of the current franchise agreement — at least two to three years in advance,” said Mark Kirsch, partner at Lathrop GPM. “By this time, the franchisee has extensive experience in the system — with the franchisor, the franchisor executives and support teams, and other franchisees — and with its own business.  The renewing franchisee has more knowledge about the system and potential success for its business than a prospective franchisee. Nonetheless, this is time for the franchise to evaluate the potential trajectory of both its business and the system. This review should focus as much, or more, on operations and finances, than legal.”

Consider the Financial Implications

After a few years in business, you have the personal experience to evaluate whether the business is a good fit for you and your community. However, you should also take time to consider the future of the business and the market it addresses. 

Consumer trends and demands are constantly evolving. Even if you are still seeing demand right now, you should look toward the future and consider whether that demand is likely to persist for the entire term of your renewed agreement.

Renewal Is Not Just an Extension of the Original Agreement

Renewing a franchise agreement involves the execution of a new agreement, and the terms are not always the same as what you agreed to when you first signed. In many cases, five to 10 years have passed and the franchisor very well could have adapted the agreement based on developments and new insights gleaned during the period of the initial agreement.

Even if you intend to renew and see a great future for yourself and your business with the franchisor, you should still do some reading. Go over an updated Franchise Disclosure Document, and read the new franchise agreement carefully. Things like royalty fees and required equipment or platforms may have changed, and you need to be aware of this.

Franchise Agreements Are Negotiable

If you are interested in renewing your franchise agreement but aren’t entirely sure about what is outlined in the new agreement, you can negotiate. How much the agreement is changed, if at all, is entirely up to the franchisor, but if you aren’t comfortable with the terms of the agreement, it doesn’t hurt to ask.

“Generally, franchisees can always negotiate, or seek to negotiate, franchise agreement terms,” Kirsch said. “Whether the franchisor is willing to do so depends on the nature and scope of the terms, as well as the relative size and leverage of the franchisee and franchisor … While changes to the foundational economic terms, such as royalty rates and ad fees, are unlikely to be negotiated, issues such as changes to address intra-family transfers, or the grant of additional development options, may be reasonable subjects to raise with the franchisor.”

The Internicola Law* Firm notes that things like the franchise fee, royalty rates, brand development fund requirements, and products or services that will be offered by the franchise generally are not negotiated by trustworthy franchisors.

resource written by the firm reads, “A good franchisor should be unwilling to negotiate on these items because by giving you a special deal (i.e., you are charged a lower franchise fee or you pay a lower royalty rate), the franchisor is treating its franchisees disparately and, more than anything, this should be viewed as a warning sign as to the integrity of the franchisor and the seriousness of its franchise system.”

Choosing to Exit Is Not a Failure

While many happy franchisees renew their agreements, choosing to step away from the business is not always a bad thing. Franchising provides a platform that entrepreneurs can use to build a sustainable business, but once it’s built, how it brings the most value to you is up to you. 

Staying in the business and choosing to build value for another period of time can be beneficial. If the terms of the new agreement aren’t in line with your goals, you have a few options: sell the business back to the franchisor; sell the business to a third party; or stop using the franchisor’s protected branding, systems and process, and continue to operate your business under a new name and model.

“As part of the pre-renewal evaluation, a franchisee should consider whether it wishes to renew and be part of the system for another term (of five, 10, or more years). Or, would an exit be more desirable?” Kirsch said. “If a franchisee wishes to exit, it is better to sell the business as an ongoing enterprise to a new franchisee than allow the franchise agreement to expire. This business evaluation should be undertaken before renewal, because if the franchisee does not renew, the franchise term expires and there is nothing to sell or transfer.”

Kirsch noted that, in these cases, there are legal implications for each option. Some franchisees might reinvest into the business for the following term and choose to sell the business to a third party — with the franchisor’s permission. Or, if family members are already involved in the business, the franchisee might work with an attorney and the franchisor to plan for an intra-familial transfer. 

When renewal time arrives, remember why you got into the business in the first place. Franchising is a vehicle for entrepreneurs to achieve their dreams, and the end of a franchise agreement term is a prime time to evaluate how the business can best support your future.

Learn more about key aspects of the renewal process from these related articles on 1851 Franchise:

*This brand is a paid partner of 1851 Franchise. For more information on paid partnerships please click here.