Do you really have to think about renewals when you’re looking for a franchise business opportunity to invest in?
You should. You can find sad stories about franchising, and quite a few of them center on renewal. The franchise was great, the franchisees were happy, and then it came time to renew.
It might reduce the suspense to list the things that can happen when it comes time to renew:
- The franchisor can decide not to renew the agreement. They don’t have to have a good reason. When the renewal comes up, not renewing is one of the options. Since renewals may come up after as long as twenty years, it can be a shock to lose a franchise. The franchisee may feel like he has put his life into the franchise, and the ending of the agreement can be the end of a career.
- The franchisor can renew, but with different terms. It’s completely legal for a franchisor to raise royalty payments, add restrictions on what the franchisee can do, change the number of franchises they’ll allow in a given area, or make any other changes they please. This is a new contract, and the franchisee doesn’t have to sign it, but a signature means the new terms have been accepted. Of course, the changes may be positive for the franchisee, but that doesn’t come up in the sad stories.
As you’ll know if you’ve read some of those sad stories, by the time you’ve spent a couple of decades in the franchise, it’s too late to make any changes to the agreement you signed in the first place. Your attorney will say you should have read it before you signed it.
So what’s the solution?
Read it before you sign it.
When you’re researching franchise business options, be sure to notice the renewal clause. You may be able to stipulate that your territory can’t be reduced when you renew, or that renewal is automatic as long as you meet the conditions your franchisor has in mind.
Don’t accept verbal assurances like, “We always renew” or “Don’t worry about that — we can talk about it when the time comes.” Make sure that you are willing to abide by the terms specified in your franchise agreement.
Along with the length of time before the renewal and any special rights you can claim, you’ll also find the cost for renewal in your franchise agreement. There are usually renewal fees that don’t cover anything but the renewal. You may also be required to update your franchise with new equipment, training, or design changes.
These things should not be problems — after all, you have years to prepare. Figure out the financial costs and plan ahead, setting aside funds regularly if that’s what you need to do. If it wouldn’t be worth it for you to upgrade your facility and do some more training when it’s time to renew, it might not be a good idea to renew anyway.
Finally, don’t wait till the last minute to discuss your situation. If your franchisee agreement is coming up for renewal, talk with your franchisor so there won’t be any surprises on either side.
