When you buy a franchise, you're buying your own business. That doesn't mean you have the right to own it forever. You sign a franchise agreement that dictates how you are allowed to operate the franchise you've purchased.
Franchise agreements are necessary to ensure that all franchisors maintain the standards of the franchise business and to make sure the "brand" is protected. The length of time a contract is in effect for can vary, and it depends on the franchise. It can range from five years to 15 years, give or take on either end.
After the contract ends, you have an option to renew the franchise, or you can decide to sell it. A franchise agreement stipulates the length of the agreement between the franchisee and franchisor. The terms and conditions of renewing a franchise agreement are under a provision called "renewal rights."
This section will tell you under what circumstances a franchise agreement can be terminated and the process for renewing when the term is over. There usually is no problem getting a franchise contract renewed unless there have been issues between the franchisor and franchisee. The franchisor always has the right to refuse to renew a franchise contract for many reasons. When this happens, it's usually because the franchisee did not meet the franchisor's demands and responsibilities.
The parent company always has the right to terminate a franchise agreement early as well. If the franchisor isn't operating the franchise according to the contract, he can lose the right to use the franchise's intellectual property, including name, logos, and patented methods of operation. If there is any money coming to the franchisee due to the growth and success of the business, the franchisor is obligated to pay that sum per a franchise agreement.
There's typically nothing to worry about when it comes to owning a franchise. In most cases, the choice to renew a franchise is in the hands of the franchisee, assuming they have met all of their obligations. The franchisor wants to keep franchise locations active. The parent company of a franchise isn't going to deny a franchisee contract renewal if there is a successful franchise in place. That would mean finding a new franchisee to cover the territory, the costs associated with training a new franchisee, and any loss of income losing a franchise location would entail.
The Arbitration Clause
The right to refuse renewal isn't always cut and dry. There is something called an arbitration clause in cases where the franchisee and franchisor have a conflict of interest that might lead to the loss of rights to the franchisee or when the franchisor isn't satisfied with the franchisee's performance.
This prevents the franchisor or the franchisee from presenting a case before a judge in a court of law. However, contract renewals are not always set in stone. Successful franchisors have the power to renegotiate franchise renewals to extend the length of the renewal contract.
There are specific things you can do as a franchisee to ensure your contract is renewed. Here are some steps you can take:
- Always make sure your renewal fee is paid.
- Follow your franchise agreement.
- Inform the parent company well in advance that you want to renew your contract.
- All current training and franchise requirements by your team must be met.
- Keep your business up to date with all franchise guidelines and standards in mind.
- Make sure you are in good standing with the franchisor on all contractual obligations.
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