My Franchise Agreement is About to Expire – Now What?
While 5, 10, or 20 years or more (the typical length of most franchise agreements) may seem like an eternity when you first sign your franchise agreement, eventually this period will come to an end. When that time comes, what should you do? What are your rights and obligations? How much control does the franchisor have over your next move?
The answers to these questions will depend on the language of your specific franchise agreement, although some general principles can be identified:
One option that you will most likely have will be to renew your franchise agreement for an additional term. The franchise agreement will likely impose conditions on your right to renew, including an obligation to inform the franchisor of your intent to renew within a prescribed time window preceding the date your franchise agreement is set to expire. Franchisees should note this restriction on their calendar well in advance to make sure they do not inadvertently miss out on their opportunity to renew.
Other conditions on renewal may include the following:
- Coming current on all payment obligations owed to the franchisor and vendors
- Signing the franchisor’s then-current form of franchise agreement
- Releasing the franchisor from any potential claims arising prior to the time of renewal
- Payment of a renewal fee
Franchisees should remember that, just like with their original franchise agreement, renewal franchise agreements are subject to negotiation. In fact, upon renewal, a successful franchisee may have additional leverage to negotiate more favorable terms (such as royalty rates and default provisions) for the renewal period.
If you choose not to renew, whether you simply let the franchise agreement expire or sell your business to a third party or back to the franchisor, you will be subject to a host of obligations post-termination. One of these obligations (with which the franchisor will demand immediate compliance) is to stop using the franchisor’s trademarks and trade dress, and completely de-identify the business as a franchised outlet. While for home-based franchise opportunities this may be less of an issue (though you may still have business cards, social media accounts, and other identifying materials that will need to be disposed of), for restaurants, fitness centers, day care businesses, and brick-and-mortar retail outlets this can be a substantial undertaking. A knowledgeable franchisor will likely send a representative to your facility to “assist” in the process or inspect your work upon completion.
If you choose not to renew, you will also become subject to the post- termination non-competition and non-solicitation covenants contained in your franchise agreement. The scope of these covenants may very well be a key factor in your decision whether or not to renew.
Non-competition covenants prevent former franchisees from operating or owning an interest in a business that “competes” with their former franchised business and other franchised outlets still in the system. I put “competes” in quotes because this term can mean many different things, and its meaning will depend on the specific language contained in your franchise agreement. Depending on the franchise system, your non-competition covenant may:
- Prohibit you from having involvement in any business that offers the same goods or services offered by your former franchise
- Prohibit you from having involvement in any business that offers competing goods or services
- Extend for a period from one to three years
- Cover a geographic area within a certain radius of your former franchise
- Cover a geographic area within a certain radius of any other existing franchised outlet
Even to the extent that you are able to open a new, non-competitive business after your franchise agreement expires, your franchise agreement may still prohibit you from soliciting customers of your former franchised outlet for your new business. The franchisor will likely own exclusive rights to your customer list, and the franchise agreement’s non-solicitation covenant will prevent you from contacting these individuals for any business purposes. While the franchisor’s interest here may be somewhat questionable – if your new business is truly non-competitive and there is no possibility of siphoning customers from a successor franchisee or franchisor-owned outlet – the fact remains that this provision is still likely to be in your franchise agreement. That said, if relations are good, you may be able to seek a concession or negotiate a license to use the customer list to jumpstart your new venture.
These are just a few of the many considerations that come into play when a franchise agreement reaches the end of its term. Franchisees facing expiration will be well-served to plan their next move in advance and seek appropriate legal and financial advice.
Jeff Fabian is the owner of Fabian, LLC, a boutique intellectual property and business law firm serving franchisors and franchisees. Contact the firm directly at 410.908.0883 or firstname.lastname@example.org. You can also follow Jeff on Twitter @jsfabian.
This article is provided for informational purposes only, and does not constitute legal advice. Always consult an attorney before taking any action that may affect your legal rights or liabilities.
Negotiating the Franchise Agreement
Now that we’ve discussed the franchisor’s point of view and arguments towards negotiating the franchise agreement, here are a couple of tips for not wasting time on trying to negotiate items which franchisors do not alter and concentrating on the change-able clauses in the Franchise Agreement.
5 Ways to Evaluate Your Franchise Options
A great way to go and figure out whether or not the franchise you’re thinking about is the right one for you is to just go into a location and take a look around. Watch how things run. Talk to some of the employees or the customers. Figure out what day to day operations are like. If you have a big problem with the day to day business for any reason then it probably isn’t the right franchise for you. But if you go there and think that the business is great then it’s probably a good fit.
Franchise Disclosure Document for Dummies – Part 3
In Item 8 of the FDD, franchisors are required to disclose designated and approved suppliers, franchisees’ mandatory purchases, and any rebates they receive from vendors as a result of franchisee purchases.