Renewals – what to expect from a franchising contract
Renewal – as the name suggests, is an opportunity. An opportunity to reassess performance to date, to review the current position and, most importantly, to plan for the future. Here, Natalia Shvarts discusses the typical things to expect from a renewal clause and why they can be a great time for pause and reflection in a franchising relationship.
All contracts are relationships and have a duration or, a ‘term’ and franchise agreements and franchise relationships are no different. The difference is that whilst with ordinary contracts there are a number of different options, franchise agreements tend to follow the same principle – they are entered into for a fixed term with an opportunity to renew.
Renewal clauses tend to be typical will usually cover the following four aspects:
One. The process – it will usually specify whether notice is required, when it should be issued and by which party (most commonly the franchisee). As a franchisor, how do you build the process? Well, a good place to start is to consider what you as a franchisor would want to see happen if your franchisee is non-compliant and cannot or does not want to become compliant (since compliance with your system and processes should be one of the main criteria for assessing whether the franchisee is eligible for a renewal term)?For some businesses closing the business down is an option, but this is not necessarily a very straightforward option for all. If you are in the business of providing vital services upon which your clients or customers rely, then simply shutting the doors may not be an option that you would want to take. It may be that a sale of the business is the only practical outcome. Whatever that looks like assessing your franchisee’s compliance will be the first step. Do you already have a process for that? Can renewal be linked into it? If the franchisee is non-compliant, they should be allowed a period to put things right – this needs to be sufficiently long but not too long. For some businesses this means that the renewal process needs to start at least 12 months prior to the expiry of the term, for others 6 months or even 3 months may be more appropriate.
Two. Conditions – it will set out conditions which the franchisee must satisfy in order to be eligible for renewal. These would usually include obligations such as ongoing compliance with the franchisor’s system and processes, i.e., not being in breach of their obligations which is an eligibility condition as well as conditions of renewal itself, for example completion of refresher training. The reality is that once a business is up and running, franchisees often feel that they cannot take time out but refresher training, especially 5 or 10 years into the business can be absolutely invaluable and most franchisees appreciate the opportunity of being able to get away and focus on strategic aspects – something they may not be able to do when they are in the business dealing with daily challenges. The refresher training is not necessarily a repeat of the training they had when they first joined the network. In fact, renewal training should be different and should focus on growth, mindset, and future goals.
Three. Documents – the clause will normally state that the franchisee will be required to enter into the franchisor’s then standard form of franchise agreement and in signing the renewal agreement the franchisee and the individual are releasing the franchisor from any claims they may have up to that date.
Some franchisees get nervous, understandably so, because the franchisor is unlikely to be able to guarantee that the renewal agreement will be on the same terms. In fact, most agreements will state the opposite – that the terms of the renewal agreement may and will be different. The logic behind this is that the franchisor does not have a crystal ball and cannot know what the future may hold and what its system would look like in 5- or 10-years’ time and since one of the franchisor’s promises to the franchisee is to continue to develop the system, the franchisor must have the freedom to make changes. What we should not forget it that franchisor’s success is built on franchisees’ success. Any franchisor wants its network to succeed and therefore making an agreement uncommercial or unworkable for its franchisees will be like shooting itself in the foot.
Four. Fees – the clause should set out what fees, if any, are payable at that stage. Most commonly, these are typically limited to legal and admin costs. Linking into the above – a franchisor makes money from the ongoing fees it receives from its franchisees and therefore fees charged at renewal should be limited to reimbursement of the actual cost of renewal and no more and certainly should not be a profit-making exercise.
I said at the beginning that renewal is an opportunity and unlike other relationships, in a franchising relationship, a renewal is an opportunity to pause, reflect and make a plan. We often talk about the fact that franchisees should have an exit plan from the beginning and every renewal allows you, as a franchisee, to check in against your plan and adjust if necessary. Is your exit plan to sell in 5 years or 10 years? What price do you want to achieve and what do you need to have in place to achieve it? What support do you need from the franchisor?
For a franchisor, a renewal is a chance to check in with the franchisee – to celebrate their achievements, to review support structure, to influence the future trajectory. If the franchisee is a great performer, renewal is the time to discuss future plans. Could this franchisee be your next multi-unit franchisee? If the franchise has plateaued, what are the causes and what can you do to help your franchisee get to the next level or is this indeed the right time to start having a conversation about exit and how you can help your franchisee achieve this in the right way.
By Natalia Shvarts