Franchise Agreement Renewal: Sign Again or Sell?
Your franchise agreement is nearing its end, and the renewal paperwork is either on your desk or about to be. Do you sign again, or sell? Franchise agreement renewal is a decision, not a formality, because the federal Franchise Rule has franchisors state in Item 17, where it applies, that franchisees "may be asked to sign a contract with materially different terms and conditions than their original contract" (16 CFR 436.5(q)(3)). Sign again if you want to run the franchise for the whole new term on the new terms. Look at selling if you do not.
What does a franchise agreement renewal actually ask of me?
It may ask you to sign a new agreement, and the new one can differ from the one you hold now. Whether it does is written in your own documents.
Item 17 of the Franchise Disclosure Document is where your franchisor summarizes this. It has a row for renewal or extension of the term and a row for the requirements to renew or extend (16 CFR 436.5(q), rows (b) and (c)). The rule also asks the franchisor to say what "renewal" means in its system. It is a summary that points to sections of your agreement, so your agreement and your attorney hold the real answers.
When the renewal terms arrive, read them for these questions. They are questions to ask, not a list of what your agreement contains:
- Term. How long is the new term, and when does it end?
- Fees. Is there a renewal fee, and do the royalty or other fee rates change?
- Updates. Does it require a remodel, new equipment or new systems, and by when?
- Territory. Is your territory the same as before?
- Guarantee. Does it ask you to guarantee obligations personally, as your first agreement may have?
- Conditions and notice. What must be true for you to renew, and by what date must you tell your franchisor?
Renewal fees, term lengths and remodel costs vary, because each franchisor sets its own.
When do I have to tell my franchisor I want to renew?
Your agreement sets the window, and it differs from one system to the next. Find the notice requirement in your agreement and put the date in your calendar today.
Then ask your franchisor in writing for the renewal terms and the timetable. A written answer is something your attorney can read against your agreement, and a phone call is not. If you are leaning toward selling, a sale also needs your franchisor to approve the buyer. How long that takes varies, so do not leave the decision to the last month.
When does signing again make sense?
Signing again makes sense when you want to operate the franchise for the whole new term and the business earns enough to carry what the new agreement costs. That comparison is arithmetic on your own books.
Ask your franchisor to put each cost of renewing in writing, then set them against the earnings you would actually keep over the new term. A required update is the item to price closely, because it is spending you make up front for years you still have to operate.
Two situations change the picture:
- Several locations. Their terms may end in different years, so the renewal question can come back more than once. Our article on selling a multi-unit franchise covers the choice between one location and the portfolio.
- A manager runs it. A manager changes how much of the new term you give personally. It does not change what you sign. Our article on selling an absentee-run franchise covers what a buyer asks about a location that runs without you.
When does renewing stop making sense?
Renewing stops making sense when you do not expect to run the franchise for the new term. A renewal date forces the question of whether you want another term at all, and retirement, burnout or another opportunity are the reasons the answer turns out to be no.
Here is how the two choices differ. Signing commits you to the new term. Selling leaves the decision about that term to a buyer your franchisor approves.
A renewal that asks for a large update is the clearest case. You would be spending on years you may not want to work. Whether a buyer would pay that spending back is a valuation question, and it is one for the people who value franchises every day.
Whether to renew in order to sell is a different question, and so is how the years left on your term affect a buyer's view. We cover both separately. Remaining term and renewal timing affect value and timing, so give us your end date when you ask for a valuation.
What happens if I do not renew?
The relationship ends when the term ends, and your agreement says what you must do and what you may not do afterward. Item 17 has a row for your obligations on termination or non-renewal and a row for non-competition covenants after the franchise expires (16 CFR 436.5(q), rows (i) and (r)).
Read both before you decide. A non-compete after the term can limit what you do next, and that is a question for a franchise attorney reading your agreement.
What should I do first?
Five steps, all within your control:
- Find your agreement and write down the end date and the notice window for renewing.
- Ask your franchisor in writing for the renewal terms and the timetable.
- Have a franchise attorney read the renewal against your agreement, including its transfer and non-compete clauses.
- Decide how many more years you want to run the franchise.
- Get a current number for what the franchise is worth, so the choice is not only about costs.
That number is a free Opinion of Value, and it commits you to nothing. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor, free and with no card on file. Request your free Opinion of Value and tell us when your term ends.
If you decide to sell, we help with buyer screening, due diligence and offer negotiation, franchisor approval, paperwork and closing steps, and confidentiality is available throughout. Our sell a franchise page shows how we work with owners.
Frequently asked questions
Your agreement is the place to start, and state law may also matter, so whether yours gives you a right to renew depends on both. Item 17 of the Franchise Disclosure Document has a row for renewal and a row for what you must do to renew. Have a franchise attorney read both against your agreement.
You can ask, and whether your franchisor will move is up to it. Ask in writing, and have a franchise attorney read the answer before you sign.
They can. A new agreement carries its own transfer terms, and they may differ from your first agreement's. Read the transfer clause in the renewal before you sign it.