Does a Franchise Agreement Automatically Renew?

Are you coming to the end of your franchise agreement term? If you are - or if you’re just thinking ahead - it’s worth considering the franchise renewal process. Many investors are keen to know whether franchisors automatically renew their contracts and whether there are any franchise renewal fees. Let’s find out.

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If you’ve signed a franchise agreement, it’s a good idea to consider your future with the business you’ve joined and how you can make sure your relationship remains mutually beneficial. Here, we’re shedding light on the franchise contract renewal process and how you can roll over your agreement without damaging your business.

Does the franchise contract automatically renew?

Under normal circumstances, it’s standard practice for the franchisor to automatically renew the franchise contract, especially if it has a shorter than average term.

However, many franchisors have different renewal procedures, and some will have specific conditions for the franchisee to meet before the contract’s end date. As a result, it’s important to know the details of your franchise agreement renewal process so you don’t get caught out further down the line.

According to the Franchising Code of Ethics created by the British Franchise Association (BFA), renewal details should be included in a franchise agreement. Generally, the BFA believes franchise agreements should roll on, provided franchisees fulfil their contractual obligations without breaching the agreement terms, comply with the terms of renewal and pay any fees.

Did you know? The BFA is a great resource for anyone working in the franchise world - its website has industry research, useful contacts and professional development materials.

If you are prepared to adhere to the terms of franchise agreement, it’s reasonable to assume your contract will continue. In fact, the BFA says the franchisors have an obligation to renew the agreement if the franchisee has met all its conditions.

If a franchisee’s business has been successful, the franchisor should have little reason to prevent contract renewal. In doing so, they would stand to lose the royalties generated by the unit and damage the franchisor’s finances as a whole.

Sometimes, franchisors include a clause in the franchise agreement detailing how the terms will change if both the franchisor and franchisee let the contract term roll on. Usually, either party can terminate the agreement later by giving a period of notice.

What happens if neither party wants to renew the agreement?

In this situation, the BFA suggests either party may provide notice of their intention to terminate the agreement, provided they follow the terms of the contract. But if they fail to give notice, the franchise agreement will remain in force and the person ending it risks being in breach of contract.

How to renew a franchise contract

If you’d like to renew your franchise contract, take these six steps to get the process started.

1. Keep a record of the deadline for applying for a renewal

Some franchisors impose strict deadlines for applying for renewal, so make sure you request an application as early as possible. Usually, franchisees must raise the subject at least six months before their contract end date.

It’s a good idea to make a note of relevant dates in your calendar so you don't accidentally miss the deadline. You’ll need to remember when your agreement term ends, when your notice period starts and when your renewal fees are due. You should also find out when your client contracts, insurance policies and data protection policies expire.

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>> Read more:

• Franchising 101: 6 Reasons Why You Should Hire a Franchise Lawyer
• Top 7 Franchise Law Issues to Know
• Franchisor Tips: Essential Guide for Setting Franchise Fees

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2. Check whether there are any renewal fees

Many franchisors charge a renewal fee, which should be specified in the franchise agreement. This fee may vary depending on the industry and the size of your franchise unit.

The franchise contract could include a clause allowing the franchisor to increase their royalty fee afterward the renewal date, depending on how your business has performed.

3. Find out whether the franchisor has any other criteria for franchise contract renewal

Your franchise agreement may include a clause telling you to repair any fixtures or fittings, or refurbish or upgrade your premises before you can renew your contract. So, always make sure you understand your obligations fully and work out how much it will cost you to make the necessary changes.

Even if there’s no renewal fee, you may have to pay for other expenses.

4. Check whether you can negotiate a lower franchise fee

The franchise contract renewal process provides an excellent opportunity to negotiate your franchise fee with your franchisor. Although it might seem unlikely they’ll agree to a reduction, they may consider it if your business has been particularly successful.

After all, if you sell your business and the new franchisee isn’t as successful, they’ll end up losing money - even if they charge the new investor a higher fee. A pragmatic franchisor will weigh up the pros and cons and be eager to keep great talent in the network for as long as possible.

As a guide, the BFA suggests the average ongoing franchise fee is 11.7 percent of total sales for franchisors who charge a percentage-based payment rather than a fixed one.

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>> Read more:

• What is a Franchise Agreement?
• Franchising 101: Can You Terminate a Franchise Agreement Early?
• Franchising 101: 10 Things You Must Know About Franchise Agreements
• Five reasons why the franchise agreement is in favour of the franchisor

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5. Determine how much longer you want to run your franchise unit for

Make sure you’re comfortable committing to a new franchise term. During this step, you should consider your long-term ambitions.

For example, if you’re renewing a 10-year contract but would like to sell your business within the next decade, you’ll be exposing yourself to a degree of risk. There’s no guarantee you’ll be able to sell the franchise at a higher price than your original franchise investment, as market conditions may worsen.

6. Seek professional advice

The UK franchise sector isn’t subject to any specific laws, so it can often be challenging to interpret franchise agreements and understand your rights and obligations.

To remove any doubt, it’s always a good idea to consult a franchising solicitor who can review your contract and raise any potential concerns. You can find a full list of quality solicitors with expertise in franchise law on the BFA website.

More advice and expertise

The franchise model can be complicated, so it’s often helpful to do some extra reading in order to gain a better understanding of your obligations and opportunities for growth. You’ll find additional guidance on running a franchise unit in our catalogue of business articles, published daily. Or explore specific topics from the search box.