Are you thinking about creating a franchise or have you already entered into a franchise agreement? This is an exciting and stressful time in your life. They invest a lot of time and money. Maybe you had to pay to equip the premises. You have royalties and many obligations to the franchisor. Chances are you`ve focused on the best possible job to do business, and you may not have thought about what`s going to happen when the franchise agreement arrives. Jeff Fabian is the franchise and brand lawyer and represents both start-ups and active franchisors. It is available at 866.545.7859 or online at www.fabianlegal.com. You can also follow Jeff on Twitter @jsfabian. However, there may be a condition in your franchise agreement that you are prohibited from owning or operating a business that, for a period of time, is in direct competition with your former franchisor. You must ensure that, when signing your original contract, you are alert to such conditions or restrictive agreements after termination. These alliances are legally enforceable and could see that you will have to stop trading completely when you leave the franchise. In the absence of a separate agreement between you and your franchisor, certain sections of the franchise agreement regulate the renewal or transfer of a franchise – or what happens if your franchisor decides that you have completed your course in its system. This article provides an overview of some of the conditions, challenges and opportunities that may be offered to you when considering your extension options.
When a franchisee pays a franchise fee of $40,000 for a five-year term, with a 5-year renewal fee with an annual fee of $10,000, this equates to a 10-year term for $50,000 or $5,000 per year for each term of the deductible. If the franchise was a home or home business that, at the time of termination, returns to the franchisor the rights related to the franchise, which is then free to resell that area to another franchisee. If the franchise business is operated from a fixed retail site, there may be goodwill with the site and there may be a reflection on whether the franchisor wishes to take over the retail site and eventually resell it to a new franchisee. Franchisees generally have contractual options to renew franchise agreements. In addition, many states have passed franchise laws that create a legal right for a franchisee who wishes to renew his or her franchise. The factors that will be taken into account by franchisors with respect to franchise renewal relate primarily to the past service of the franchisees, the satisfaction of the franchisees and the payment of all the franchisor`s fees and obligations, and whether the franchisee will upgrade the franchising activity to comply with the standards, specifications and requirements in force at the time. In addition, most agreements find that the life extension is conditional on the franchisor executing the franchising operation at the time of renewal. If the franchisor has the right not to renew on this basis, check the agreement to see if, in such circumstances, it authorizes the franchisee to use the franchisor`s intellectual property and expressly excludes the exploitation of the retention, termination and confidentiality provisions after the expiry of the current term of the franchise agreement. Franchisees should remember that, as with their original franchise agreement, renewal agreements are being negotiated. Indeed, a successful franchisee may have additional levers to negotiate more favourable terms (such as licensing fees and provisions for losses) for the extension period.