Franchising an Existing Business: Designing Renewal Conditions and Review Procedures

When turning an existing business into a franchise, it is easy to put renewal arrangements on the back burner while focusing on preparations for opening. Yet franchisees invest and develop their staff with the contract term in mind. They cannot run their businesses with confidence if their future depends entirely on the franchisor’s discretion. Before recruiting franchisees, define the renewal conditions and decision-making process, and make them a shared commitment across the franchise community.

1. Decide how renewal will work and set decision deadlines

The first step is to decide how the contractual relationship will continue. Different procedures are needed depending on whether the agreement renews unless notice is given, the franchisor reviews an application from the franchisee, or both parties agree to enter into a new contract. Do not simply state that an agreement ‘may be renewed’. Specify who must do what, and by when, for renewal to take effect.

The agreement should address at least the following:

• The initial contract term and the term following renewal
• The deadlines, methods and recipients for renewal applications or notices of non-renewal
• The deadline for the franchisor to notify the franchisee of its decision
• The documents, fees and matters requiring agreement for renewal
• What happens if the process is not completed on time

It is important not to set these deadlines solely around the franchisor’s administrative needs. Work backwards from the preparation time franchisees need to consider leases, finance, employment arrangements and capital expenditure. Avoid a process that requires franchisees to make substantial renewal-related investments before the franchisor has reached a decision.

For example, if the premises lease and franchise agreement have different terms, a franchisee may be able to renew the franchise agreement but unable to secure premises from which to trade. Renewal discussions should therefore also cover the prospects for continued use of the premises. However, record the assessment of property arrangements separately from the decision to approve renewal of the franchise agreement.

2. Distinguish legal obligations from the franchisor’s own conditions

Japan has no single, comprehensive statute dedicated to governing all franchise agreements. However, specific regulations apply to businesses within their scope, and general legislation, including the Civil Code, also applies to contracts. It would be wrong to assume that the absence of a dedicated franchise law leaves franchisors entirely free to set renewal conditions.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors operating a qualifying chain business to provide prospective franchisees with written information and an explanation before entering into a contract. Whether a business falls within its scope depends not simply on what it calls itself, but on statutory criteria: its members are primarily small and medium-sized retailers, and its standardised contracts provide for ongoing sales of goods or the arrangement of such sales, management guidance, the use of trade marks or similar rights, and the collection of money on joining. Contract duration and renewal conditions are also important information to disclose while prospective franchisees are considering joining.

Seek professional advice on the legal steps required at renewal, taking account of the form of the new agreement and any changes to its terms. Rather than assuming that the disclosure obligations at initial entry apply unchanged to every renewal, assess the actual procedure being used.

The franchisor and franchisee are also independent businesses, and their dealings are subject to the Antimonopoly Act. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act provide guidance across a broad range of franchises, not just retail and food service. Using renewal as an opportunity to impose disadvantageous terms unilaterally may raise issues such as abuse of a superior bargaining position, depending on the parties’ relative positions and the particular circumstances.

In your materials, explain legal requirements separately from the review conditions the franchisor sets to maintain quality. Above all, do not describe the franchisor’s own conditions as ‘required by law’.

3. Do not base renewal reviews on an individual’s impressions

A renewal review should establish whether the outlet can continue to deliver on the brand’s promise. However, vague criteria such as ‘subject to the franchisor’s approval’ do not tell franchisees what they need to improve. For each review item, define the supporting records and the assessment method.

Review item	Records and facts to check	Points to consider
Compliance with contractual obligations	Payment records and unresolved issues	Distinguish minor delays from persistent non-compliance
Qualifications, licences and permits needed to operate	Validity and renewal status	Check those required for the premises and services offered
Maintenance of quality and safety	Inspection records and history of corrective action	Look at improvements achieved, not just past findings
Arrangements for continued operation	Responsible managers and prospects for continued use of the premises	Consider whether franchisor support could resolve any issues

This is an example of how to structure a review, not a statutory list of renewal checks. Tailor the items to the business and align them with the contractual renewal conditions. Rather than making an automatic decision solely because sales targets have been missed, it is advisable to consider changes in local trading conditions and the support provided by the franchisor.

In practice, it can help to use categories such as ‘ready for renewal’, ‘renewal decision pending confirmation of corrective action’ and ‘individual assessment with a view to non-renewal’. Where issues can be remedied, specify the action required, the deadline, the support the franchisor will provide and how progress will be checked.

Also establish a contact point through which franchisees can challenge factual errors. Having another responsible manager check the information gathered by the reviewer, and recording the reasons for the final decision, can reduce inconsistent treatment between outlets. Do not determine whether renewal can lawfully be refused from the contract wording alone: seek legal advice that takes account of the history of the relationship and the individual circumstances.

4. Explain renewal costs and changes to terms clearly

If you charge a renewal fee, make clear the amount or calculation method, when it is payable, and the procedures or services it covers. If payment is collected before the review, you will also need refund conditions for cases where renewal does not proceed. Simply stating that fees will be ‘discussed separately at renewal’ does not allow franchisees to plan their future finances.

When changing contractual terms, do more than hand over a new agreement. Provide a comparison showing the old terms, the new terms, the reasons for the changes and their impact on franchisees. Bring together not only renewal fees but also royalties, charges for mandatory services and any investment required as part of renewal, so that franchisees can see the full financial commitment needed to continue.

Consider whether new terms must apply to all outlets at the same time or whether transitional arrangements are possible. Even a change that helps maintain brand consistency does not automatically justify the burden placed on franchisees. Explain why the change is needed and what its effects will be, and keep records of questions and discussions.

The franchisor should maintain a renewal tracking schedule, working backwards from each contract’s expiry date. Assign responsibility for receiving applications, checking documents, holding meetings, verifying corrective action, presenting terms, setting response deadlines and concluding agreements. Trialling the process while the network is still small is a practical way to identify and correct discrepancies between explanatory materials and contracts, as well as stages where decisions get held up.

Practical takeaway: Before recruiting franchisees, prepare a one-page summary explaining when renewal is available, what requirements must be met and which terms will apply. Reflect that summary in the agreement, explanatory materials and the franchisor’s tracking schedule. This is the first step towards a lasting, cooperative relationship.