A Franchisee's Dilemma with Renewing

The vast majority of today's franchise agreements (that is, "one-sided, franchisor-oriented") normally contain the following provision as one of the conditions to the franchisor agreeing to renew the franchise agreement at the end of the initial term.

The Franchisee will sign the Franchisor's then current form of Franchise Agreement, which agreement may contain terms materially different than the terms of this Agreement.

This provision is rarely specifically negotiated by the parties, because it is included in the "standard" franchise agreement offered by the franchisor on a "take it or leave it" basis. The legal and business ramifications of this provision are not fully explained to, nor understood by, a prospective franchisee until, 5, 10 or 20 years later, a substantially different (and more onerous) franchise agreement is presented by the franchisor at the time of renewal.

An increasing number of franchise systems are now entering into a cycle of renewal. The dilemma being faced by renewing franchisees is either to: (i) sign the new franchise agreement as presented, without negotiation; or (ii) "get out of the business," as most franchisees are subject to a 1-3 year covenant not to compete upon the expiration and nonrenewal of the franchise agreement. Neither of these alternatives is reasonable from the franchisee's perspective.

Read Part 2, Renewal Provisions: What a Prospective Franchisee Should Do