As we all go through life, there are different opportunities that present themselves and different commitments that we may make. Some opportunities are a quick, short-term deals (like hiring a realtor to sell your house). Others might represent a longer obligation (like a twenty year lease on a commercial property). Just about everything done in life has some kind of time commitment associated with it.
And the franchise industry is no different. It’s definitely a different game. And when you start playing a new game, it’s important to know the rules! So let’s go over some of the basics, starting with “what is a franchise term” or better yet “what is the typical term of a franchise”. We recently received from call from a business owner wanting to franchise a business and asked, “Is it true that once I sell a franchise to someone, that person is a franchisee for life” and “what is the length of a franchise relationship”.
Defining the Playing Field
The Franchise Disclosure Document (FDD) is a package that outlines the franchise relationship and is required by law in order for a business to offer the sale of franchises (read more about the FDD). Part of this package is the Franchise Agreement, which defines obligations and the relationship between the franchisor and its franchisee, basically outlining the “rules of the game” (see our frequently asked questions for more information on the Franchise Agreement).
Just like all other business related arrangements, there is always a term to the Franchise Agreement. The franchise term can range from five years to thirty-five years. After the term ends, guess what? It is NOT an automatic renewal! In fact, either party can determine if they want to renew. In some cases the franchisee may choose not to renew. Or the franchisor may determine that it will not renew the franchisee (for various reasons we can get into later).
When we create the franchise structure, we help our clients decide on each and every detail that makes up the franchise relationship (check out our article that discusses how we structure your franchise program). The length of the franchise term is one of many decisions and whether to charge a renewal fee for an extended term is another.
And it is good to know that when the FDD is updated or revised and if there are changes to the franchise term or renewal fees, when the current franchisee renews, the franchisee will be subject to the then-current terms of the new FDD (learn about what it means to update or revise the FDD).
We certainly hope our clients foster long-term, fruitful relationships with their franchisees; but, you’ll be glad to know that the franchise term is NOT a forever. It is not a “till death do you part” situation! Based on the type of business you operate and other factors that we will take into consideration, we will identify what will be the best franchise term for you during the franchise development process. Call us directly at 1-877-615-5177 or feel free to contact us to learn more.
