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Navigating the lifespan of franchise agreements is vital to maintaining a successful franchise network. One key decision franchisors face is whether to continue a franchise relationship at the end of the term by extending it or renewing it. This decision carries significant implications for both franchisors and franchisees. It requires careful consideration of various factors. This article will explain the benefits of extending the term of a franchise agreement and the alternative options available to you. By understanding the implications of extending the term of this crucial contract, you can make an informed decision that supports your network’s interests.
What Does Extending the Initial Term of the Franchise Agreement Mean?
The term of a franchise agreement refers to the duration when the contractual arrangement between the franchisor and franchisee (the franchise agreement) remains in effect. Franchise agreements operate for a set time. The franchisee can operate under the franchised business model and brand during this time. In exchange, they pay franchise fees to the franchisor. For the agreement’s term, the franchisor has duties and responsibilities relating to the franchisee. You will set the timeframe for this term within the franchise agreement at the start of your relationship with the franchisee.
Extending the initial term of the franchise agreement is different to renewing it. The following table outlines the difference between extension and renewal.
| Term | Definition |
| Extending the franchise agreement | Extension refers to prolonging the duration of the existing agreement without creating a new one. |
| Renewing the franchise agreement | Renewal typically involves entering into a new agreement after the current one expires. Sometimes, a franchisor charges the franchisee a renewal fee. |
In essence, renewal starts a new contractual relationship while extension continues the current one.
If either you or the franchisee wants to end the franchise relationship, you can opt not to renew or terminate it. If you plan to terminate it, you must provide the franchisee with written notice, including your reasons for the termination.
Benefits of Extending the Term
Extending the franchise agreement term can offer various benefits, including fostering stability by allowing the agreement to continue on the same terms. You will set a specific duration during which the existing franchise agreement will continue. Doing so can give you and the franchisee more time to consider renewal or alternative next steps.
Further benefits of extending the term of the franchise agreement include:
- allowing the franchisee to continue reaping the rewards of their investment for an extended period;
- enabling the franchisee to grow their business further; and
- reducing the administrative burden of frequently renewing the franchise agreement as you do not need to renegotiate its terms.
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Drawbacks of Extending the Term
Extending the term of a franchise agreement also comes with several potential drawbacks that you must consider. For instance, extending the term of an existing contract does not enable you to change its terms. You can alter, add or remove particular terms when you renew a franchise agreement.
Some additional drawbacks of extending the franchise agreement include:
- potentially limiting flexibility as initial terms will continue, remaining the same;
- longer terms may lead to franchisee complacency as they do not have the pressure of impending renewal; and
- uncertainty in rapidly changing markets as longer-term commitments can carry more risk.
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Alternative Options
If you intend to continue your relationship with the franchisee, you have options beyond extending the franchise agreement. This includes renewing the existing agreement. Each option has separate benefits and drawbacks. Your decision on which to choose can depend on your circumstances and those of your franchisee.
Key Takeaways
The benefits of extending the franchise agreement include allowing the franchisee more time before a potential renewal and enabling stability. The drawbacks of extension include reduced flexibility as the terms remain the same and potential uncertainty in rapidly changing markets.
Beyond extension, several alternative options are available. Regardless of which avenue you choose, it is crucial to notify the franchisee of your decision in writing before the end of the franchise agreement, as per its terms. The more time you give the franchisee, the better positioned they are to prepare.
If you would like legal advice about extending the term of 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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