Buying a franchise: check the renewal terms

When joining a franchise network, it is easy to focus on opening the business and the initial contract term. Before buying a franchise, however, find out on what terms the relationship can continue once that term expires. Running your business well does not, on its own, guarantee a new agreement. The renewal clause determines whether continuation is a right you can exercise, an automatic process or something that depends entirely on fresh negotiations.

1. Find out what the agreement promises about renewal

A fixed-term franchise agreement will generally expire at the end of the agreed period unless provision has been made for it to continue. Do not interpret the franchisor’s talk of a long-term partnership as a promise of another contract term. Ask to see the specific written clause that sets out the renewal procedure and each party’s rights.

Identify which of the following models the draft agreement uses:

• Automatic renewal: the agreement continues unless either party gives notice by a specified deadline that it is to end. Check the length of the renewal term too.
• Franchisee’s right to renew: you can secure another term by exercising an agreed right and meeting specified conditions.
• Renewal by mutual agreement: another term requires both parties’ approval, so neither may be obliged to continue.
• Duty to negotiate: the parties undertake to discuss renewal, but do not necessarily commit to entering into a new agreement.

The practical difference is significant. A right to request negotiations is not the same as a right to remain in the network. Wording such as “the agreement may be renewed” also leaves open who decides on renewal and on what grounds.

Ask the franchisor to explain the procedure using a specific example: what happens if you want to continue and have met your obligations, but the franchisor wants a different franchisee to run the outlet? Compare the answer with the wording of the agreement. If the answer promises more than the text, ask for the agreement to be clarified.

2. Make renewal conditions objectively verifiable

Finland has no specific franchising legislation and no statutory franchise disclosure document regime. This does not mean that incomplete or misleading information may be provided before an agreement is signed. Alongside the agreement itself, general legislation and principles of contract law govern the relationship.

Relevant legislation when assessing renewal terms includes Finland’s Contracts Act, section 36 of which allows an unreasonable contract term to be adjusted or set aside. The Competition Act and the Unfair Business Practices Act may also apply. These laws do not, however, give franchisees a general automatic right to another contract term. Do not rely on the possibility of a term being adjusted as a fallback for an unclear renewal clause.

The Finnish Franchising Association’s Code of Ethics is a form of industry self-regulation, not legislation. Find out whether the franchisor has committed to it and how that commitment is reflected in the agreement. A reference to the Code of Ethics is no substitute for a precise renewal clause.

If renewal depends, for example, on properly fulfilling your obligations, ask for the assessment criteria to be defined. Establish at least the following:

• Which breaches or failures could prevent renewal?
• Over what period will your performance be assessed?
• Will an issue that has already been remedied affect the decision?
• Which documents or assessments will the decision be based on?
• Will you receive written reasons if renewal is refused?

Be wary of a clause that makes renewal depend solely on the franchisor’s “satisfaction” without more detailed criteria. Negotiate an assessment process whose outcome you can reasonably anticipate. If the franchisor wants to retain unfettered discretion, recognise this as a commercial risk before deciding to buy.

3. Agree the timetable and the terms of the next agreement together

The renewal timetable can be just as important as the right to renew itself. If you must give notice of your wish to continue well in advance, but the franchisor has no deadline for responding, the future of your business could remain uncertain for a long time.

Build a clear sequence into the agreement: your notice, the franchisor’s assessment, submission of any further information, a written decision and signature of the new agreement. Also specify who must receive notices, the permitted method of delivery and when a notice is deemed to have been received. Keep evidence of delivery.

At the same time, establish whether the relationship will continue on the existing terms or whether renewal requires you to accept the franchisor’s then-current standard agreement. In the latter case, the current agreement alone will not tell you what your financial or legal obligations will be during the next term.

Ask to agree when the new standard agreement and all its schedules must be made available to you. You should receive the documents for review before making a binding commitment to continue, not afterwards. Also confirm what happens if you do not accept the new terms offered.

Ask specifically about any renewal fee and how it is determined. Is the amount agreed in advance, calculated on a specified basis or only announced at renewal? Check for any assessment and processing fees too, and whether they are refundable if no new agreement is reached. These are not fees automatically imposed by law: their contractual basis needs to be checked.

4. Test the procedure before signing

Use the draft agreement to carry out a short written renewal test. First, imagine that both parties want to continue. Can you identify all the necessary notices, decisions and fees without additional verbal explanations from the franchisor?

Next, test a scenario in which the franchisor refuses renewal. When will you be told? Will your business have enough time to plan an orderly closure? Can you ask for the grounds for the decision to be reviewed? Also find out whether the franchisor can withdraw renewal approval once it has been given, and under what conditions.

Finally, check the other side of automatic renewal. If you do not want to continue, forgetting to give notice could commit your business to another term under the agreement. As soon as the agreement is signed, put the deadlines in the business calendar and assign responsibility for giving notice.

Have a solicitor or other lawyer familiar with franchise agreements review any unclear renewal rights and clauses granting broad discretion in particular. Make sure any agreed clarifications are included in the contractual documents themselves.

Practical summary: before you buy, establish who decides on renewal, on what grounds, by what date and on what terms. A long-term relationship needs a clear renewal procedure, not just a shared intention.