In the franchise world, franchisees and franchisors enter into a franchise agreement for a set time (the initial term). Generally, after the initial term, the franchise agreement provides that the agreement may be renewed if enumerated conditions are met.
Below are some thoughts and ideas of how enhance your franchise brand by promoting renewal of your successful tenured franchisee and practices to work through the renewal process with folks.
Commonly, one condition to renewal is the notice requirement. The franchisee is required to give notice to the franchisor of their desire to renew the franchise agreement. The franchisor may also be required to give notice to the franchisee, if the franchisor does not intend to renew the franchise agreement. The notice requirement under the franchise agreement is important and should be strictly enforced. Here is why:
- Timely notice can lead to the timely signing of a new agreement or the winding down of the franchised business.
- Franchisors cannot decline to renew a franchisee without proper notice.
- Failure to give notice can result in extinguishment of renewal rights.
Clear up old business and releases. During the course of the prior franchise term, the relationship between the franchisee and franchisor has developed. Issues, disputes, breaches, and defaults may have arisen. At the time of renewal, a release is typically signed as a condition to the renewal of a franchise agreement. The requirement for signing a release is good practice. However, when known issues of dispute, breach, or default exist under the prior franchise term, releases are insufficient to address old business. In event of disputes, breaches, or defaults, best practice requires: (1) the franchisor giving franchisee’s advance notice of disqualification for renewal, breaches, or default (see renewals part 1 on Notices), (2) the franchisee and franchisor negotiating and entering into a settlement and release agreement (not a standard release) resolving and releasing claims incident to renewal, and (3) finally, the granting of a renewal term by way of the franchisee and franchisor signing a renewal franchise agreement.
Add value at the time of renewal. One of the challenges I hear from franchisor is the reluctance of franchisee to sign a renewal agreement. As a result franchisee goes on at nausea under the old franchise agreement after expiration. Here are some thoughts on getting franchisees to “Yes” and sign the new franchise agreement:
- Create some buzz. Celebrate 10 years of the franchised business with a marketing anniversary campaign, make a big announcement in the franchise community, visit the franchisee, and find out their successes and challenges.
- Give value for the renewal fee. How about turning the renewal fee into value for the franchisee and the franchise system? Tenured franchisees are sometimes using old advertising materials, outdated software, stall websites/micro sites, or worn out signage/fixtures. Is there a package or discount program that you can offer your renewing franchisees to bring value to their business, and your brand?
- Evaluate territory boundaries. Make renewal a time of assessment. Is the franchisee fully utilizing the entire franchise territory? Is the franchisee’s growth stymied by its territory size? Consider the selling of additional territories, buying back a portion of the territory, or offering the franchisee incentives for transferring/selling a portion of its franchise territory.
Good cause for non-renewal of a franchise agreement. The process and conditions for renewal are commonly set forth in the franchise agreement. The typical franchise agreement provision may read something like this: ‘upon the satisfaction of the conditions set forth below, the Franchisee may be granted a renewal or successor franchise term.’
It seems rather straight forward. If the franchisee meets established conditions, the franchisee is entitled to renewal of the franchise agreement. This seemly boilerplate provision for renewal of the franchise agreement is facially deceiving. The analysis of whether a renewal agreement should be offered must go beyond a checklist of conditions. Laws in numerous states require good cause for denying renewal of a franchise agreement and in states where such laws do not exist, franchisors may be exposed to common law claims for non-renewal.