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Renewal Provisions: What A Prospective Franchisee Should Do

A prospective franchisee needs to retain an experienced franchise attorney to review all of the terms of the franchise agreement including the renewal provisions.  If the typical renewal provision is in the franchisor's standard form of franchise agreement, try to renegotiate this provision to make it fair.  In my opinion, the following language makes the renewal provision fair:

The Franchisee must sign and deliver to the Franchisor a renewal franchise agreement that will not vary the material business terms reflected in this Agreement.  However, the Franchisee agrees to sign the Franchisor's renewal franchise agreement, even if materially different from this Agreement, if the new franchise agreement was collectively negotiated and approved by 50% of the franchisees in the system.

The franchisor community argues that it needs total flexibility in making changes to the franchise system and to the franchise agreement to reflect changes in technology, market conditions, franchise and other laws, demographics, etc.  These are all valid considerations.  However, because a franchise is sold more like a "partnership" rather than a master-servant relationship, certainly input by the franchisees is desirable, necessary and equitable.  In reality, these changes are made unilaterally by the franchisor, not so much as a result to reactions to changes beyond the franchisor's control, but really as a result of the franchisor's desire to increase its income, to draft around adverse court decisions which favor franchisees or otherwise to improve its own self-interest, at the expense of its existing franchisees.

A prospective franchisee may assume and expect that future franchisees will be able to hold the franchisor in check on the extent to which the franchise agreement is changed to greater favor the franchisor through negotiation.  But in today's world, since most franchisors continue to offer their franchises on a "take it or leave it" basis, no such negotiation occurs.  Therefore, there is a compelling need for collective negotiation on a system-wide basis through an independent franchisee association to make the changes reasonable and necessary in reaction to changes beyond the franchisor's control and to continue to have the franchise relationship be a "win-win" for both the franchisor and its franchisees

Read part 1 of this series, The Franchisee's Dilemma

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