Franchisee Basics: Term of Agreement

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Within the Franchise Agreement, the franchisee will find the length of time for which the franchise agreement is valid (how long the franchise relationship will run) referred to as the term of the agreement. This length of time will differ for each franchise but typically runs between five and 15+ years, with the typical time frame being a 10 year term. The franchise agreement will also set out renewal options at the end of a term, given that the investment in the franchise business only begins to see its profitability after a number of initial years where the major start up costs are paid down.

Key Considerations pertaining to the Term of the Franchise Agreement:

• Relationship to Investment: The length of the term often corresponds to the size of the initial investment. Franchises with substantial build-out costs, such as hotels or sit-down restaurants, may have longer terms (e.g., 15-20 years) to allow the franchisee time to recoup their investment and realize a return.

• Alignment with Leases: It is crucial for a franchisee's lease term to align with their franchise agreement term. A mismatch could be disastrous; for example, a franchisee might have to pay rent on a space even after their right to operate the franchise has expired.

• Renewal vs. Expiration Most franchise agreements include a renewal clause, but renewal is almost never automatic. A franchisee must actively exercise their right to renew and meet specific conditions laid out in the agreement.

  • Franchisor's Discretion: While a franchisor generally wants to renew with a successful franchisee to continue the royalty stream, they have the right to refuse renewal if a franchisee has not met all the renewal conditions.

  • Common Renewal Conditions:

    • Upgrades: You may be required to remodel your location or upgrade equipment to meet the brand's current standards.

    • Fees: A renewal fee, which is often a percentage of the initial franchise fee, may be required.

    • Compliance: You must be in good standing, with no unresolved defaults or breaches of the existing agreement.

    • New Agreement: You'll likely be required to sign a new franchise agreement, which may have different or updated terms, including increased royalties, different operational standards, and new restrictive covenants.

  • If a franchise agreement expires without renewal, the franchisee must cease all operations and follow the "de-identification" process, which includes removing all branding, signs, and intellectual property.

• Termination A franchise agreement can be terminated before its initial term ends, typically due to a breach of contract by either party. However, the grounds for termination are heavily weighted in favor of the franchisor.

  • Grounds for Termination: Franchisors can terminate an agreement for a variety of reasons, including:

    • Non-payment of royalties or fees.

    • Failure to meet brand standards or quality control.

    • Bankruptcy or insolvency.

    • Failure to meet minimum performance standards.

    • Unauthorized sale or transfer of the business.

  • Cure Period: Most agreements will provide a franchisee with a "cure period" to remedy a breach before termination. However, for serious offenses like repeated violations, the franchisor may be able to terminate the agreement immediately without a chance to fix it.

• Post-Termination Obligations Whether an agreement expires or is terminated, a franchisee will have post-termination obligations that often have a lasting impact on their business and professional life.

  • Non-Compete Clause: This is a key consideration. The agreement will almost certainly contain a non-compete clause that prohibits you from operating a similar or competing business within a specified geographic area for a set period (e.g., 1-3 years).

  • Confidentiality: You will be required to return or destroy all proprietary information, including training manuals, operating procedures, and customer lists.

  • De-Identification: You must remove all trademarks, logos, and signs from your business location.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

The Basics to Becoming a Franchisee: Embarking on the path of becoming a successful franchisee demands an incredible amount of time and effort, given that there are only a limited number of truly successful franchisees, with those that have set themselves apart and hit the pinnacle of franchise operations and profitability. This begins with understanding the core concepts of a business franchise. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.