Franchise renewal: what to assess before buying

Buying a franchise means looking beyond opening day: how long will you be able to operate, and what will you need to do to continue? In franchising, renewal should not be treated as an informal promise. Its terms can affect the cost of buying the business and the viability of your investment, even when the outlet is performing well.

1. Understand what the law requires franchisors to disclose

Brazil’s current Franchise Law, Law No. 13,966/2019, requires the Franchise Disclosure Document (known locally as the COF) to state the contract term and renewal conditions, under Article 2, item XXII. The standard franchise agreement must also accompany the disclosure document in full, including its annexes, terms and validity periods.

The law does not set a minimum contract term for all franchises or grant a general right to automatic renewal. It is therefore not enough to hear that the network usually renews its contracts: you need to check which conditions will actually form part of your agreement.

The COF must be provided at least ten days before you sign the agreement or a preliminary agreement, or pay any fee to the franchisor or a business or person connected to it. This is a minimum interval, not a deadline for completing your review.

Compare three things: what was presented during negotiations, what the COF says and what the draft agreement provides. If the disclosure document promises renewal subject to objective conditions, but the agreement leaves everything to the franchisor’s sole discretion, ask for clarification and amendments before taking on any obligations.

2. Establish when the term starts and how to renew

A contract term may run from the date of signing rather than the date the outlet opens. In that case, months spent setting up the business reduce the time available for trading. Ask how any delays will be handled and whether the agreement allows for the term to be adjusted.

Next, identify the renewal procedure. Draw up a calendar covering:

• The contract’s start and end dates.
• The notice period required to express your wish to continue.
• The accepted method of communication and the designated recipient.
• The franchisor’s deadline for responding, if specified.
• The deadline for completing any required changes and signing the documents.

Distinguish between an automatic renewal clause, which may allow either party to object, and a simple opportunity to negotiate a new agreement. Phrases such as “may be renewed” do not, on their own, explain who decides or which criteria will apply.

Also check what happens if there is no response. Do not assume that silence means approval or that continuing to trade after the agreement expires guarantees another full contract term. Ask your lawyer to explain the implications of the proposed wording.

3. Calculate the cost of staying in the network

Renewal may involve more than a fee. The agreement may make continued operation conditional on refurbishment, equipment upgrades or compliance with the brand’s current standards. These costs need to be included in your assessment before buying, even if they will only arise years later.

Request written answers to four questions:

1. Is there a renewal fee? Check the amount, calculation method, provisions for increases and payment date.
2. Will the outlet need a mandatory upgrade? Establish the expected scope and who approves the budget.
3. Could recurring charges change? Check whether renewal depends on signing the network’s standard agreement in use at that time.
4. Is the new operating term defined? Renewing for a shorter period may affect your ability to recover the additional expenditure.

Prepare a financial projection covering only the original contract term, without assuming renewal. Then prepare a second scenario that includes the costs and term of a possible renewal. This avoids justifying the purchase with revenue from a period that is not yet secured.

Also check whether your right to occupy the premises covers the same period. Renewing the franchise does not automatically renew the lease on the premises.

4. Assess whether the conditions can be verified

Requirements to keep payments up to date and comply with standards need to be clear. If performance criteria apply, ask how they are calculated, which period will be assessed and which records will be used to demonstrate the results.

Seek clarification on past breaches that have already been remedied, disputed outstanding issues and whether you can put matters right before renewal is refused. Look for verifiable criteria, clear deadlines and formal notification of requirements. Do not assume there will be an opportunity to remedy a breach unless the agreement provides for one.

Take a list of ambiguities to your lawyer, particularly clauses allowing requirements to change without specifying limits or a procedure. The aim is not to rule out every future change, but to understand the commitment you are making.

In practice: before buying, make sure you can explain when the agreement ends, who decides on renewal, which conditions will apply and how much continuing could cost. If any answer rests solely on a verbal assurance, there is still negotiating to do.