Franchise renewal: what to assess before buying

The length of a franchise agreement affects how much time you have to recoup your investment and run the outlet. But what happens when it expires? Before joining a franchise network, find out whether continuing will depend on fresh approval, payments or changes to the business. Even a profitable operation can face difficulties if renewal requires funds that were not included in the budget.

1. Understand what the law requires on renewal

In Brazil, Law No. 13,966/2019, known as the Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to state the contract term and any renewal conditions. The COF must also include a copy of the standard agreement and, where applicable, the preliminary agreement, together with their appendices.

This does not mean there is a general right to automatic renewal. The option to continue operating, and the requirements for doing so, need to be checked in the contractual documents. Simply keeping up with payments does not replace a contractual provision allowing you to continue.

The COF must be provided at least ten days before you sign the agreement or preliminary agreement, or pay any fee to the franchisor or a person or company connected with it. This is a minimum advance disclosure period, not a limit on the time you can take to review the documents.

Compare the sales presentation with the COF and the draft agreement. If the salesperson says that “renewal is guaranteed”, look for the clause supporting that claim. If there is a discrepancy, ask for clarification and for the documents to be amended before committing.

2. Turn the conditions into a checklist

Phrases such as “good performance” and “compliance with network standards” can leave important questions unanswered. Ask for objective criteria so you understand what will be assessed, by whom and when.

Draw up a checklist covering the following points:

• Expression of interest: when and through which channel must the franchisee request renewal?
• Franchisor’s response: is there a deadline for making a decision and communicating any outstanding issues?
• Required performance: are there sales targets, operational assessments or minimum performance indicators? How are they calculated?
• Contractual compliance: which breaches prevent renewal, and is there an opportunity to remedy them?
• New agreement: does renewal retain the previous terms, or require you to accept the standard agreement in force at the time?
• Duration: how long will the next term last?

Pay attention to the difference between a renewal option that the franchisee can exercise and a possibility that depends on both parties agreeing. They do not offer the same level of certainty.

Also ask how changes in ownership or in the person responsible for running the business affect the assessment. The aim is not to remove all discretion from the franchisor, but to understand in advance which decisions rest with it and which obligations are within your control.

3. Calculate the cost of staying in the network

Renewal may involve more than signing a document. Depending on the network’s documentation, requirements may include a renewal fee, refurbishment to reflect updated branding, replacement equipment, system upgrades and further training.

Ask for a description of each requirement, how its cost is calculated and when payment is likely to be due. If no budget is available, record that uncertainty and use estimates supported by quotations, without treating preliminary figures as commitments from the franchisor.

Create a spreadsheet with four columns: obligation, estimated cost, payment date and the document setting out the requirement. Include any potential closure days for building work and the impact on sales.

Assess the return within the contract term you are guaranteed, without assuming future renewals. If the initial investment only pays for itself with a second, still uncertain agreement, your decision rests on a significant assumption that needs to be made explicit.

Then model the renewal scenario: how much would you need to reinvest, and how much time would you have to recoup that additional outlay? Refurbishment close to the contract’s expiry deserves particular attention if an extension has not been agreed.

4. Negotiate greater certainty before signing

Take a list of specific questions to your lawyer, together with the COF, draft agreement and sales communications. Ask them to assess whether the documents are consistent and what the proposed conditions would mean for you.

Points to discuss may include advance notice of requirements, time to remedy outstanding issues, approval criteria and how investments requested close to expiry will be handled. The franchisor may not accept changes, but its response will help you assess the risk.

Also speak to franchisees who have renewed recently. Use their experiences to identify costs and difficulties, without assuming that terms offered to another outlet will apply to yours.

In practice: before buying, document three answers: the conditions under which you can renew, how much continuing could cost and whether the investment makes sense without relying on renewal.