Are you thinking of starting a franchise or have you already entered a franchise agreement? It’s an exciting and stressful time of your life. You’re investing lots of time and money. Maybe you’ve had to pay to fit out the business premises. You have licence fees and lots of obligations to the franchisor. Chances are you have been concentrating on doing the best job you can to make the business successful and you may not have thought about what will happen when the Franchise Agreement expires.
Franchise Agreements are fixed term agreements, commonly lasting for five or ten years. It sounds like a long time, but those years will fly by. Do you know what will happen to your business when your Franchise Agreement term ends? Because once the agreement ends, you will lose the right to operate the business using the franchise products and branding unless you sign another agreement. You need to make sure you understand what your rights are to renew your franchise agreement so you don’t find yourself without a business!
Can I renew the agreement?
Franchisees do not have a legal right to extend or renew their Franchise Agreements. Whether you can extend your ownership of the franchise depends on what you have agreed to with the franchisor. Have a look at your Franchise Agreement. Does it have a renewal clause? If yes, that’s a good starting point. However this doesn’t 100% guarantee that you’ll be able to renew the agreement.
How do I renew the Franchise Agreement?
- Read your Franchise Agreement, especially the renewal clause to find out everything you need to do to renew the agreement and whether you are allowed to sell the franchise if you don’t want to renew.
- Notify the franchisor that you want to renew the agreement. The agreement will give a deadline for when you have to let the franchisor know if you want to renew the agreement, for example 6 or 9 months before the agreement expires.
- Pay the renewal fee. Your agreement will state how much this is.
- Make sure you are not breaching any of the terms of your agreement. If you are not meeting your obligations under the agreement, it will make it hard for you to get it renewed.
As a side note: The Franchising Code of Conduct requires the franchisor to get in touch with you at least six months before your agreement expires to let you know whether or not they want to extend or renew the agreement. If your whole agreement period is less than 6 months, they only need to get in touch one month before it expires.
Can I set up a similar business of my own?
Another thing you need to consider is that your Franchise Agreement probably contains a non-compete or restraint of trade clause. This type of clause stops you from setting up a similar business in the same geographical area for a certain period of time.
Sometimes restraint of trade clauses are too restrictive and cannot be enforced. There are also some limited circumstances in the Franchise Code of Conduct that allow franchisees to get around restraint of trade clauses when they have tried unsuccessfully to renew the Franchise Agreement. However in most cases the restraint of trade clause will apply and you need to take it seriously. Seek legal advice if you are unsure.
Time flies, so start thinking about the future now. If you would like us to think about your future too, we are happy to do so!