Five years ago, you started your franchise business. Since launching, you’ve worked hard and steadily increased profitability and enhanced your position in the market. Of course, you want to keep going, you’re even thinking about selling what should then be a valuable asset in a couple of years’ time. You’re doing so well, benefiting the franchisor too, that of course the renewal will happen automatically, right? Wrong.
The terms of the franchise agreement
Renewals are a process that is typically dictated by the terms of the franchise agreement, which many franchisees forget about during the term of initial operation, to their detriment.
Most franchise agreements state that the franchisee has the automatic right to request a renewal, which renewal will be granted provided the franchise agreement has been complied with (i.e. there is no breach). However, the ability to exercise that right of renewal is limited to a finite window, usually between 3 and 6 months prior to expiration of the original term. Failure to properly exercise that renewal may mean you lose that ‘automatic’ right to renew, and instead have to enter into negotiations with the franchisor.
Note that even if the renewal occurs in accordance with the terms of the franchise agreement, things do not simply ‘keep going’. Instead, most agreements provide that the franchisee will then be subject to the terms of the then current franchise agreement, i.e. the operative version as at the commencement of the new renewed term, which could be less advantageous to the franchisee.
In order to protect yourself, there are a number of practical steps you can take:
- Diarise the dates for renewal – while most franchisors provide a notice anyway, it’s better to be safe than sorry;
- Make sure you are compliant with all reporting, payment of fees and other obligations at renewal time – you don’t want your renewal to be rejected on the basis of breach; and
- When negotiating your original franchise agreement, request a clause whereby the franchise agreement offered on renewal will not be substantially or materially different to the current agreement, and you will not be worse off under the new agreement.
If you are experiencing issues with your attempts to renew, you should consult a franchise lawyer who will be able to review the relevant documentation and advise you of your rights. Call LegalVision on 1300 544 755 to arrange an obligation-free consultation today.