Ask 3 Questions Before Renewing Your Franchise Agreement

To hear the internet tell it, franchise renewal is a simple process. Your term is coming to an end, you tell the franchisor you want to renew, and maybe even negotiate some more favorable terms while you're at it. Done and done.

The reality is far more sophisticated. Franchises are built on standardized and repeatable processes, and that extends to their paperwork. If franchisees were able to negotiate special terms in their franchise agreements, it would expose the franchisor to serious legal jeopardy.

Any advice suggesting the terms of these agreements can be significantly changed is fiction vs fact. There are a few other options to get better terms. But long before it's time to re-up with a franchisor, there are several key questions that franchisees need to ask to better understand the waters they're wading into.

1. Do I want to renew my franchise term?

Lots of factors can come into play here. Maybe your building lease renewal is coming up at the same time as your franchise renewal, and you know ahead of time that you're going to get a big rent increase. That kind of price hike can take a real bite out of the profit margins you've become accustomed to since you first opened your doors for business.

Likewise, maybe labor laws are changing where you do business and minimum wage is expected to jump. That changes the profit picture.

There might even be something as mundane as some planned roadwork in your area that could send potential customers whizzing by, taking their dollars elsewhere.

And then there's the competitive landscape. If you own a spa franchise, for instance, and have had the local market to yourself, the calculus changes fast if a new spa breaks ground two miles away. Given the increased competition for a share of customers' wallets, you might decide that re-upping simply isn't worth it.

2. Am I in good standing with my franchisor?

Maybe you've decided that you do want to renew your franchise term. But does your franchisor feel the same way?

Every franchisor has certain financial and operational goals that it expects franchisees to meet. There are also responsibilities around required reinvestment and mandatory marketing spend.

Are you meeting those obligations in a timely manner? When issues arise, do you address them promptly? If you have a problematic track record in these areas, don't expect the franchisor to automatically want to renew with you.

How about performance? Are you consistently a top performer, or are you a perpetual laggard? Performance numbers are often made available in monthly newsletters or other communications channels, so your standing shouldn't be a mystery.

Another litmus test is simple: Do you have a good working relationship with the franchisor? You don't necessarily have to be best friends, but you do need to be able to work together in a respectful, productive, and collaborative way on issues related to the business. If the relationship is already contentious, the parent company might decide it's less hassle to part ways at the end of your term.

3. Can I renegotiate more favorable terms?

If both you and your franchisor are amenable to renewal, make sure you carefully go over the franchise agreement and the Franchise Disclosure Document with your attorney. Again, the franchisor is not likely to make any concessions here.

While flexibility is more an exception than the rule, if you feel that your requests will help move the franchise and the brand forward, it's worth a shot. These are rare conditions, and if successful, they would likely be accomplished in a memorandum of understanding.

For example, you might ask for your marketing spend to be based on total dollar amount rather than a percentage of revenue if you have a particularly high-grossing business. Alternatively, you might negotiate a longer "time to cure" period for addressing any shortcomings. It's important to know that this occurs in a minority of situations and may be put in place for a short period of time vs the new full franchise term.

Another example might be to ask to spread a required reinvestment over a longer timeline than the agreement currently allows. That doesn't get you out of doing the reinvestment, but it may give you a little more breathing room.

Finally, you might get the franchisor to allow family members to come into the business if that wasn't previously explicit. That's a particularly important perk for franchisees who were hoping to do a next-generation handoff of the business they've built.

A word to the wise, though. If you're not in the top 30% of performers, don't even bother asking for these types of concessions from your franchisor.

A franchise term may last anywhere from five to 30 years, depending on the business, so franchisees who wait until the final stretch to ask these questions and think things through are already behind.

Ultimately, the art of successful renewal is introspection and preparation that should begin two to five years before anyone even considers signing up for another franchise term.

Cody Teets is a principal at The Transition Strategists and has 25 years of experience working with McDonald's franchisees.