Franchise agreements: setting the term and renewal conditions

When you turn an existing business into a franchise network, the agreement’s term cannot simply be a number chosen out of habit. It must give the franchisee a timeframe appropriate to their investment and allow the franchisor to plan the relationship. Before offering your first agreement, you therefore need a reasoned decision on its term, start date and renewal: three connected but distinct elements.

1. Start with Italian law, not a standard term

In Italy, franchising is governed by Law No. 129 of 6 May 2004, on commercial franchising. Article 3 requires the agreement to be in writing, otherwise it is void. For fixed-term agreements, it also requires the franchisor to guarantee a minimum term sufficient for the investment to be amortised, and in any event no shorter than three years, subject to early termination for breach by either party.

This means that three years is a minimum, not an automatically suitable term. If the required investment calls for a longer timeframe, choosing the minimum without a specific assessment does not address the issue. Termination for breach must not be confused with a general right to end the relationship at will.

The same law requires the agreement to state the conditions for renewal, termination and any transfer. Matters not covered by the specific legislation are subject to the general rules of the Italian Civil Code.

Have the arrangements checked by a lawyer experienced in franchising: a poorly drafted withdrawal clause or start-date provision can undermine the balance of the intended term.

2. Link the term to the investment actually required

Start with the expenditure needed to join the franchise: fit-out, installations, equipment, the initial franchise fee and other relevant start-up costs. Simply copying the term used by another franchise network is not enough, as its investment requirements and operating conditions may differ.

Prepare an internal summary setting out:

• the investments required and when the expenditure will be incurred;
• the expected useful life of the main assets;
• the financial assumptions used to assess investment recovery;
• the time needed to launch the business and establish stable operations;
• any obligations to refurbish or replace assets during the relationship.

Do not confuse accounting depreciation and amortisation with the financial recovery of an investment. An accounting schedule shows how costs are spread over time; on its own, it does not demonstrate that the business will generate sufficient funds. Ask your accountant to supplement the asset analysis with a financial assessment, without presenting it as a guarantee of results.

Test a cautious scenario too: a delayed opening, slower sales growth or higher-than-expected costs. The aim is not to promise that the investment will be recovered, but to justify the proposed term using reasonable, documented assumptions.

3. Distinguish between signing, opening and expiry

The agreement may be signed before the franchised outlet is ready. If the entire term runs from the signing date, part of it may be spent on building work, deliveries and preparations for opening. This interval needs to be taken into account, not ignored.

State explicitly when the agreement takes effect, when the period of operating under the franchise begins and how the expiry date is determined. These dates may coincide or be separate: what matters is avoiding ambiguity and checking that the arrangements are consistent with the protection provided by law.

Also define how delays will be handled, distinguishing between those attributable to the franchisor, those attributable to the franchisee and those caused by external events. Provide for written notices, clear responsibilities and a process for agreeing any changes, rather than relying on verbal understandings.

Finally, check related commitments, such as leases and financing arrangements. They do not necessarily need to run for the same period, but a significant mismatch could leave the franchisee with outstanding financial obligations when the franchise agreement expires.

4. Plan renewal before offering the agreement

Renewal must not be presented as certain if it depends on a fresh decision by the parties. Choose and clearly describe the mechanism: automatic renewal unless notice of non-renewal is given, renewal subject to defined conditions, or fresh negotiations with no automatic renewal.

To make the process workable, specify at least:

• the deadline and method for giving notice of an intention to renew or not to renew;
• which conditions will be assessed;
• whether any new fees or investments will be required;
• how the terms for the next period will be agreed.

Avoid vague wording such as ‘renewal at the franchisor’s discretion’ without explaining the process and criteria. If you require a substantial refurbishment shortly before expiry, consider the remaining contract term and any renewal at the same time.

Record the deadlines in a calendar shared by the administration team and the person responsible for franchisee relations, so that discussions can begin well in advance. Also remember that a complete copy of the agreement and the accompanying documents required under Article 4 of Law No. 129/2004 must be provided at least thirty days before signing.

In practice: before recruiting franchisees, prepare a summary linking the investment, term, start date and renewal arrangements. Have it reviewed alongside the agreement: a well-planned expiry date makes relationships within the franchise network more transparent.