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As a franchisor, reaching the end of a franchise agreement’s term prompts crucial decisions regarding the future of your franchise network. Renewing a franchise agreement presents an opportunity to solidify your relationship with the franchisee and sustain the momentum of their franchise location. This article will explain renewal and the benefits of renewing the franchise agreement at the end of the current agreement’s term. Understanding the implications of renewing a franchise agreement equips you with the knowledge to navigate this crucial transition effectively.
What Does Renewing a Franchise Agreement Mean?
Franchisees and franchisors enter into franchise agreements for a set duration. At the end of this duration, the contract can either expire, coming to its natural end, or you can choose to renew it. Renewing a franchise agreement means extending your contractual relationship with the franchisee through a new agreement.
If you and the franchisee want to renew the agreement, it is best practice to start the renewal process a year before the end of the current term. Otherwise, start the process as soon as possible.
Benefits of Renewing a Franchise Agreement
Renewing a franchise agreement offers several benefits for both franchisors and franchises. The following table outlines some of these benefits.
| Benefit of Renewal | Explanation |
| Continuity and stability | Renewing franchise agreements enables stability for you and your franchisees. It ensures you can continue to benefit from the continuity of their franchise location, and the franchisees can maintain their established businesses. |
| Cost-effectiveness | Renewal can be more cost-effective than seeking new franchisees or establishing new locations elsewhere. You will save on recruitment and training costs associated with onboarding new franchisees. |
| Streamlined operations | Franchisees can continue their operations without significant changes to their established operations. A smooth transition into the new term minimises the risk of potential disruptions. |
| Mutual growth opportunities | Renewing can foster a stronger partnership between you and your franchisees. You can leverage your experience and insights to drive the success of the franchise location and your overall network. |
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Key Legal Considerations When Renewing Franchise Agreements
1. Notification and Best Practices
If you plan to renew the franchise agreement, you must notify the franchisee in writing before the current agreement’s term ends.
In their Code of Ethics, the British Franchise Association (BFA) set several standards for franchisors concerning renewals. These include:
- you are to set renewal terms within the franchise agreement, including the required notice period; and
- your overarching aim should be to allow the franchisee to recover their investment.
The BFA stipulates that when considering renewal, you should consider the length of the original term, your investment requirements, and your ability to change the agreement’s terms on renewal. A thorough read of your existing franchise agreement will help you determine the shape the new franchise agreement should take.
2. Changing the Terms
Renewal enables you to change the terms of your original agreement to align with your franchise network’s changing objectives. It can be great to seek legal advice when approaching a renewal period. A lawyer can help you review the terms of the original agreement and redraft it if necessary. They can also help you with the renegotiation process if necessary.
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3. Renewal Fees
Another critical consideration is renewal fees. The original agreement’s renewal terms will stipulate whether you require the franchisee to pay renewal fees if they choose to renew the agreement at the end of its term. As with any payment structure within the franchise agreement, you should be clear about how much you require and how the franchisee can pay you.
4. Non-Renewal
You might opt not to renew the franchise agreement for many reasons. For instance, if the franchisee continually fails to meet performance standards and is unwilling or unable to make suitable changes. If you decide not to renew the franchise agreement, you must provide the franchisee with written notice before the end of the current term and include the reason behind your decision.
Key Takeaways
Renewing a franchise agreement can offer a range of benefits for you and your franchisees. These benefits include:
- continuity;
- cost-effectiveness;
- streamlined operations; and
- the creation of mutual growth opportunities.
Every renewal enables you to check in with your franchisees formally. You can monitor their progress, celebrate milestones, and reevaluate your mutual objectives and plans.
Navigating the renewal process requires careful planning and consideration of your legal obligations. By adhering to your obligations and franchising best practices, you can effectively manage the renewal process and maintain successful partnerships with your franchisees.
If you would like legal advice about renewing your franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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