Renewal in Franchising
If you’ve been thinking about starting your business maybe you should consider buying into a franchise as this will give you a bit of a head start, instead of building a business starting with the bare essentials or even less. First of all, you should be completely aware of what a franchise contract entails before signing it. Many contracts are automatically renewed every five to 10 years. If you don’t have the desire to renew this agreement when it first ends, you must make your franchiser aware of this. You should give notice to your franchiser a while in advance so that you’re actions are in accordance with the UFOC (Uniform Franchise Offering Circular), which is the franchise disclosure document normally used in the franchising business. In most cases, it would suffice to place your desire in a written form at least 180 days before your contract expires. In other cases, you will find your agreement renewed automatically, if you fail to make your wishes specifically known. There’s no problem with not wishing to renew your contract when the initial five year period is over but there are still a few rules to abide by. You can’t simply change the sign on your store’s front door because things aren’t that simple.
On consulting a business attorney, it may be suggested to you that instead of not renewing your franchise, you may rather consider transferring it to a new buyer. This way you can both end your commitment to the franchise and receive monetary compensation for your contributions to the business you’ve helped build and maintain. Of course, it should be especially easy to find a buyer, if you’ve been running a successful business. You can use the help of a business broker to determine the real value of the business in the form of an appraisal by taking into consideration gross sales, profit, equipment, etc.
In fact, the franchiser may save you the trouble of finding an appropriate buyer, If you’re unable of finding one yourself. You may be charged a fee by the franchiser, but this is expected as the franchiser will have to deal with the costs of the new franchisee between screening and then training. This all may sound good so far, but you have to understand that choosing not to renew your contract will still cost you money. For starters, you will lose the money you originally invested into the business. Also, keep in mind that a the end of the five year period stated in your contract, if and only if you’ve managed to conduct your business successfully and in accordance with how you’ve been instructed by the franchiser, you will be considered for a renewal. However, if you decide you’re better off without a renewal, the franchiser may gladly offer up a fair price for your business. In fact, some agreements stipulate that a franchiser should have priority when it comes to buying the business. The contract may also indicate that the franchiser’s refusal takes priority over yours.
Be careful though, that repeated violations of the terms of agreement when running your business may result in its complete termination. In this case you won’t be able to sell it or make money off of it. This is called ‘transfer’ in franchising. This is because you are not the actual owner of the business, but you’re actually leasing it while using your business skills and know-how to further establish the franchiser’s brand name, in exchange for an income.
Use legal consultation before buying a franchise, so you are fully aware of what you’re stepping into. You may fear attorneys and consider them corporate vampires, but there’s no denying that they can come in handy sometimes!