Dec 11, 2018 - Blog by |

All franchise agreements contain conditions of renewal. These are provisions that require the franchisee to satisfy certain requirements in order to extend its franchise rights beyond the end of the initial term. Common renewal conditions include an obligation to cure any outstanding defaults (i.e. pay any past-due advertising fund fees or royalties), an obligation to update to then-current system standards and an obligation to sign the franchisor’s then-current franchise agreement.

For many franchisees, this last condition will be the only sticking point. They will be up-to-date on all aspects of their franchise, and they will be a solid profit center for the franchisor. But, in order to renew, they will still be required to sign a new agreement, which could have terms that are substantially different from those that currently govern their franchise.

The Risks of Signing Your Franchisor’s “Then-Current” Franchise Agreement

Why does this matter? Among other potential concerns, being forced to sign a new franchise agreement could mean:

  • Agreeing to a higher royalty percentage or new royalty terms (i.e. a “fixed” or minimum royalty).
  • Agreeing to a higher advertising fund contribution percentage.
  • Agreeing to new requirements regarding suppliers, system standards and mandatory upgrades.
  • Agreeing to new, less-favorable terms with regard to indemnification and dispute resolution.
  • Agreeing to grant additional termination rights to the franchisor and to face additional obligations in the event of termination.
  • Agreeing to even stricter conditions for subsequent renewals.
  • Losing the benefit of terms that you negotiated in your original franchise agreement.

With these potential risks in mind, it is imperative for existing franchisees to carefully review, and likely negotiate, their renewal franchise agreements prior to signing.

Negotiating a Renewal Franchise Agreement

As a franchisee, you have the same right to negotiate your renewal franchise agreement as you did to negotiate the agreement that you signed when you bought your franchise. Although the language in your current franchise agreement’s renewal clause may appear fairly strict, franchisees are routinely successful in negotiating reasonable protections into their renewal agreements. Some potential (and potentially important) tactics for negotiating a renewal franchise agreement include:

  • Fixing any errors and inconsistencies within the renewal franchise agreement.
  • Modifying the renewal agreement’s material terms (i.e. royalty and advertising fund fee percentages) to match those in your existing agreement.
  • Negotiating any new provisions that are unfairly one-sided in favor of the franchisor.
  • Negotiating any provisions that mirror those in your existing franchise agreement and that gave you particular issues during your initial franchise term.
  • Negotiating the length of your renewal term and any conditions for subsequent renewals.

Of course, this list is not exhaustive, and you may have particular concerns that warrant special consideration during the renewal process. Just like your original franchise agreement, your renewal agreement represents a long-term binding commitment, and you need to make sure that you are comfortable with its terms to the greatest extent possible.

Contact the Goldstein Law Firm

The Goldstein Law Firm is a franchise law firm that exclusively represents franchisees and dealers. If your franchise is up for renewal and you would like to speak with an attorney, you can call 202-293-3947 or contact us online for a free initial consultation.

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