Buying a franchise can be an excellent investment, and there are many advantages to buying a well-established brand and business model. However, it is important to consider that franchise agreements do not last forever. Instead, they operate on a fixed term, and you must be aware of what happens at the end of this term. This article will explore the difference between renewing and extending your franchise agreement in New Zealand.
Franchise Terms
A franchise term refers to the length of time a franchisee can operate the franchise. During the franchise term, the franchisee is entitled to:
- access and use the franchisor’s operations manual to replicate the business;
- use the franchisor’s name and marketing materials. These rights are usually granted by way of a licensing agreement; and
- have access to support and training provided by the franchisor.
At the end of the franchise term, the franchisee must cease operating and will no longer have the right to use the franchisor’s trade marks or business systems and processes. This will usually involve returning all confidential franchise information, including the operations manual and any marketing materials.
Renewal Terms
In some cases, franchise agreements will have a renewal term. A renewal term allows the franchisee to decide if they wish to continue operating the franchise for a further specified time.
However, you should be aware that most franchise agreements do not have automatic renewal provisions. Instead, the franchisee is typically required to meet certain criteria before being granted the right to renew. This might include meeting certain sales standards during the initial franchise term. In some instances, the franchisor may grant a renewal in exchange for certain conditions, including:
- payment of a renewal fee;
- refurbishing the premises or purchasing new equipment; and
- entering into a new franchise agreement that may contain different terms.
Extensions
In some instances, the franchise term may be extended rather than renewed. This may be agreed upon on a short-term basis, such as a month-to-month agreement. Extensions differ from renewals in that the terms and conditions of the initial agreement will continue.
However, the franchisor should:
- outline in the franchise agreement whether a franchisee will be able to extend the term of the franchise agreement, and
- detail the processes they will use to determine whether an extension will be granted.
Entering a Franchise Agreement
You must review your franchise agreement carefully to assess any options to renew or extend the agreement. You should carefully negotiate these terms.
When reviewing a franchise agreement, assess the following:
- whether you will be capable of obtaining a return on your initial investment within the franchise and renewal terms outlined;
- if there is any option to renew the term of the agreement;
- what the costs are associated with renewing the agreement;
- if the terms and conditions of the renewal term will be different from the initial franchise term; and
- whether you will be subject to a restraint of trade at the end of the franchise term.
Engaging a Franchise Lawyer
Franchise renewals and extensions can be difficult to navigate. Seeking legal advice to help you understand and negotiate these terms in the franchise agreement is important.
For example, the wording of a renewal clause will impact your ability to renew your franchise agreement, including specifying any timeframes in which notice is required to be given to the franchisor or other actions carried out. A franchise lawyer can ensure such a term is worded correctly in the franchise documents to protect your interests.
Further, a franchise lawyer will be able to explain the implications of the renewal term and the requirements for renewal. This will ensure you know exactly what you are getting into before signing any binding agreements.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
You must carefully review your franchise agreement to understand your rights surrounding renewing or extending your franchise agreement at the end of your initial term. Some key points to look out for in a franchise agreement include:
- if you will be capable of obtaining a return on your initial investment within the initial franchise term outlined;
- whether there is any option to renew or extend the term of the agreement;
- what the costs are associated with renewing the agreement; and
- if the terms and conditions of the renewal term will differ from the initial franchise term.
If you need assistance renewing your franchise agreement, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
An option to renew allows the franchisee to decide if they wish to continue operating the franchise for a further specified time, subject to satisfying any applicable renewal criteria. For example, some franchise terms will operate on a ‘5×5’ basis. This means the franchise period is five years, with an option to renew for another five years. In most cases, the right to renew is not automatic.
In some instances, you may extend a franchise term. For example, this may be agreed upon on a short-term basis, such as a month-to-month agreement. Usually, where a franchise term is extended, the terms and conditions of the initial agreement will remain the same during the extension period.
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