When considering a franchise, there are many factors to examine, such as the location, costs, and possibly a lease. However, one item that often does not get as much attention as it deserves is the term (i.e. how long the franchise agreement is in place). The [length of] term can have a substantial impact on your franchise long term and should be carefully considered.
In most cases, the term of a franchise agreement is usually fixed for five or ten years. In deciding on the term, there are numerous considerations. First, if you have a lease, you should make sure the term of the franchise agreement is the same length or slightly shorter than the length of your lease. The concern is that if your lease expires during the term of the franchise agreement and you are unable to renew the lease, you may not be able to find a location to operate your business (and would have to incur more costs to move to a new location) and will be in breach of your franchise agreement.
In addition to looking at your lease, you should also think about your aversion to risk. The longer the term, the more committed you are to the franchise. If the franchise is successful, a lengthier term can work well as you will not have to pay a renewal fee for quite some time and you will be bound by the terms of the original franchise agreement for a longer period (franchisors will often charge a fee to renew the term and require you to sign the most recent version of their franchise agreement, which is often updated with more provisions in their favour). Conversely, if owning a franchise does not work out (whether it be financially or because being a franchise owner is not for you), having a shorter term can mitigate some of the risk so that you do not have to continue operating for an extended period of time.
If you are uncertain on what length of term would benefit you, one possible solution is to negotiate a right of renewal. A right of renewal gives you the option to unilaterally renew the franchise agreement for a set amount of time at the end of the term. This could give you some of the benefits of a longer term that I mentioned above while still giving you a way to end the franchise agreement sooner without a penalty. However, franchisors can sometimes impose certain terms in order to exercise a right of renewal (for example, you must not be in breach of the current franchise agreement or you may be required to renovate the location based on the franchisor’s current standards).
These are just some of the items to consider when negotiating the term for your franchise agreement. If you have any questions regarding franchise law, you may wish to contact a lawyer.
This blog post was written by Jason Peyman, a member of the Real Estate and Business Law teams. He can be reached at 613-369-0376 or at email@example.com.