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franchising aspects 23 Jul 2009

Renewing a franchise agreement

Renewal of franchise agreement depends on your assessment as a franchisee

By Pallavi Majha Chief Sub Editor

Franchising is not a life time contract as a franchise agreement is signed for a fixed time period and with the completion of this duration the franchise agreement expires. In such a situation the franchisee needs to get his franchise agreement renewed in the event of expiry of the contract.

However, this renewal process is quite complex. If the franchisee is a success, the franchisor would be more than willing to renew it, though the terms and conditions vary a lot from the original franchise agreement. The franchisor has all the rights to choose the parties they wish to do business with and may use their own judgment in entering into a new franchise relationship and to refuse the renewal of franchise agreement.

As Major KV Rajan, Executive Director, VETA says, “We have a provision in our initial agreement that renewal is an option open to both the franchisor and the franchisee to renew or not. The franchisee is required to express his option in writing 90 days prior to the closure of the present agreement. Even if the franchisee desires to continue, the franchisee should have fulfilled the obligations as per terms of agreement.”

Regarding the renewal of franchise agreement, Mr Ram Aggarwal, Chairman, Vishal Retail, informs, “Basically we look for growth and benefits from the franchisee. The rules are same for both new and old franchisees and they have to sign contracts after the termination of the old contract.”

Renewal

Just as with the first time around when you renew, you obtain the rights to use the franchisor’s trademarks and operating methodology in a certain area for another specified period of time. Every franchisor tries to mould the successor’s agreement. Many successor agreements are for the same no. of years as the original agreement while others are for a shorter period of time. Some franchisors offer unlimited, continuing renewals called evergreen agreements while others permit only one successor term. Be aware of the terms when you sign the original franchise agreement.

Regarding the renewal process, Mr NP Singh, Director Retail, Samsonite opines, “Irrespective of an old or new franchisee one needs to sign an agreement which is not a very complex thing to do because it simply covers the detail related to what we expect a franchisee to deliver and what we extend as support to them to run the business effectively.”

The franchisee needs to check the original franchise agreement before signing a new document for:

  • Unlimited renewals that can now be limited to one or two renewals
  • Term may have been shortened from 10 years to five years
  • Right to exclusive territory replaced as the new agreement may allow the franchisor to establish new franchises or company-owned units nearby.
  • Change in royalty rates
  • Advertising contributions and
  • Level of service they are required to provide to their franchisees

Suggestion for the franchisee

Know your rights: The original franchise agreement may provide more rights to you than you know or than the franchisor wants to acknowledge. Have a professional review your original franchise agreement and the renewal document.

Find out the difference between the two agreements: In some cases, the old agreement binds the franchisor for longer than the initial ten-year term. It may not allow the franchisor to take away territory or encroach on your territory.

Do not go for renewing: Franchisees have another choice whose agreements are expiring is to not renew. If you want to stay in business, the concern here is that your franchise agreement may have a non-competing clause prohibiting you from operating a business similar to the franchised business for a period of time after the franchise agreement has expired. A franchisor may seek to enforce this clause as it determines that your continued activities in the business are impacting the franchise system.

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