Franchise agreement terms: how to plan for renewal

When turning an established business into a franchise network, deciding how the relationship will begin is not enough. You also need to determine how long the franchisee will have the right to operate your concept and on what terms they can continue. The agreement’s duration and renewal provisions affect willingness to invest, planning for the premises and the stability of the whole network. This is not simply about the number of years, but above all about a predictable decision-making process.

Base the agreement’s length on investment, not a template

The franchisee usually funds equipment, alterations to the premises, stock and start-up costs. The period for which you grant them the right to use your concept should make financial sense in light of those costs. Copying the term from someone else’s agreement without doing the calculations is therefore a poor starting point.

Prepare an investment breakdown and distinguish between assets that can still be used after the relationship ends and those tied specifically to your brand. Standard equipment may have other uses, while a bespoke interior or branded signage may represent expenditure that is difficult to recover. Also allow for the time needed to build a customer base and a realistic opportunity for the franchisee to earn a return.

Use at least a base-case and an adverse scenario. Check how a slower start, higher operating costs or a temporary disruption to trading would affect the payback period. A reasonable agreement term does not guarantee that the investment will be recovered, but it should be based on substantiated assumptions rather than a sales promise.

Specify separately when the agreed term begins. Signing the agreement and opening the premises may not happen at the same time. If preparation takes up a substantial part of the contractual term, the franchisee will have less time left to trade. Also set out what happens if the opening is significantly delayed.

Distinguish between expiry and a right to renew

The Czech Republic has no dedicated franchise law. Franchise agreements are generally concluded as contracts not specifically defined by statute under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General contract rules apply, along with other provisions depending on the agreement’s content, such as those governing licences. Franchise agreements are not subject to a special franchise registration requirement.

Czech law does not impose a general mandatory minimum term for franchises or an automatic right to renewal. The specific contractual provisions are therefore decisive, subject to compliance with general law. The European Code of Ethics for Franchising is a self-regulatory standard, not Czech legislation; it may be binding, for example, through membership obligations or a contractual commitment.

When drafting your rules, distinguish between three possible approaches:

• A new agreement: continuing the relationship requires both parties’ consent. A request from the franchisee alone does not secure continuation.
• A contractual right to extend: the franchisee can exercise a right to continue if they meet conditions set in advance.
• Automatic extension: the relationship continues unless either party gives timely notice that they do not wish to extend it.

No single approach is best in every situation. What matters is that recruitment presentations do not promise guaranteed continuation when the agreement leaves the decision entirely to the franchisor.

Make renewal conditions verifiable

A statement such as ‘the agreement may be renewed if the franchisor is satisfied’ gives the franchisee little guidance. Conditions that can be evidenced are more useful: payment of outstanding amounts due, a valid right to use the premises or compliance with specific operating requirements. For each condition, specify the assessment date and the documents needed to demonstrate compliance.

Distinguish between serious breaches and minor shortcomings that can be remedied. If the franchisee is to have an opportunity to supply missing documents or rectify a problem before the decision is made, describe that process in advance. Renewal will then not depend on a vague assessment of the last meeting with head office.

Also clarify the terms on which the relationship will continue. Will the original terms remain in place, or will a new agreement be signed? If you require the franchisee to accept your current standard agreement, they need sufficient advance notice of its wording and financial implications. Simply referring to unknown future terms weakens the value of a renewal promise.

Be equally transparent about any renewal fee. State whether one applies, how it is calculated and when it is payable. Do not hide it behind a general reference to administration costs.

Plan refurbishment and renewal decisions together

Renewal is often a suitable time to refurbish the premises. It should not, however, bring an unexpected list of investment requirements delivered just before the agreement expires. When developing the concept, establish how you will assess the need to replace or upgrade equipment and when the franchisee will receive a detailed statement of requirements.

Pay particular attention to investment required shortly before expiry. Before the franchisee commits to it, they should know whether the relationship will continue and for how long. Otherwise, they may fund a change they cannot make reasonable use of during the remaining term.

Create a simple timetable: an expiry reminder, submission of the renewal application, provision of the terms, assessment and written confirmation of the outcome. Allow enough time for financing and decisions about the premises. Also identify the person responsible at head office and specify a method of serving notices that provides evidence of delivery.

Practical takeaway: Before approaching your first franchisee, establish a model for the agreement’s duration, a clear renewal mechanism and a decision timetable. Check that the franchisee can identify not only when the agreement ends, but also the conditions and costs of any continuation.