The term and renewal of your first franchise agreement

When turning your existing business into a franchise, you need to decide how long the relationship will last. A short term may seem flexible, but it can leave franchisees with too little time to recoup their investment. A long term, on the other hand, calls for arrangements that will stand the test of time. Choosing the contract term carefully gives your franchise network a reliable foundation.

1. Base the term on the investment cycle

Do not simply copy the contract term used by another franchise. Start with what an independent business owner needs to operate your concept. Consider fit-out, equipment, training, opening costs and working capital. Then assess how long those investments will remain useful and when replacements will be needed.

Distinguish between accounting depreciation and actually recouping an investment. An asset may be fully depreciated on paper while the business owner is still repaying the finance used to buy it. Equally, making a profit does not automatically mean there is enough cash available for repayments, replacements and personal living costs.

Have a cash flow forecast prepared for the proposed term. Alongside a base case, include a scenario in which sales build more slowly or costs are higher than expected. This does not guarantee a return, but it helps test whether the contract term is economically justifiable.

For each major investment, record:

• when the franchisee needs to make it;
• its expected useful life;
• the associated financing commitments;
• whether replacement is likely to fall within the initial contract term.

Does financial viability depend on renewal? Make that explicit. Do not present a possible second contract term as though it were already guaranteed.

2. Set out the start date, end date and renewal arrangements separately

The Dutch Franchise Act (Wet franchise), incorporated into Book 7 of the Dutch Civil Code, has applied since 1 January 2021. It does not prescribe a general fixed minimum term for franchise agreements. Nor does it automatically give every franchisee a right to renewal. This makes clear contractual arrangements particularly important.

First, decide when the term begins. Is it on signing, on opening or on an agreed calendar date? If building work overruns, that distinction can make a substantial difference. Also clarify which obligations apply before opening and what happens if opening is delayed.

Then choose a renewal mechanism deliberately. For example:

• Expiry on the agreed date: continuing the relationship requires a new agreement.
• Automatic renewal: the agreement continues unless either party gives notice in time, following the agreed procedure.
• A renewal option: one party can exercise a right to renew if predefined conditions are met.

These options have different implications. Avoid wording such as ‘renewal by mutual agreement’ if you actually intend to offer a specific right. State who must take which action, by what deadline and in what form. Ask a specialist franchise lawyer to check that the provisions are internally consistent and compatible with general contract law.

3. Make renewal conditions clear and assessable from the outset

Prospective franchisees should be able to understand what continuation depends on. Use specific conditions rather than relying solely on wording such as ‘to the franchisor’s satisfaction’. These might include meeting payment obligations, completing necessary training and remedying demonstrable breaches.

Explain how you will assess whether those conditions have been met. What information will you use? When will you discuss shortcomings? Will the franchisee have an opportunity to put them right? This helps prevent a renewal discussion from becoming an unexpected final verdict.

Also specify which terms may change on renewal. Will the franchisee, for example, have to sign the version of the agreement in use at that time? If so, an opportunity to renew is not the same as continuation on the same terms. Make that distinction clear and have the provisions checked for legal enforceability.

When entering into a new franchise agreement, you must take account of the statutory pre-contractual disclosure obligations and the minimum four-week period. Do not assume, without legal review, that an existing relationship makes those obligations unnecessary. Also distinguish changes to the current agreement from arrangements for a subsequent contract term: changes during the current term may be subject to separate statutory information and consent requirements.

4. Schedule renewal discussions before new investments

Put key contractual dates in a shared calendar as soon as the first agreement is signed. Work backwards from the end date: when must continuation be confirmed, when should the assessment begin, and when will the franchisee receive any proposed new terms?

Discuss major replacement investments before the franchisee commits to them. An expensive refit shortly before expiry calls for clarity about how much longer the franchisee can expect to operate. Consider whether postponement, an alternative investment or arrangements for continuation would be appropriate. Do not promise a payback period you cannot substantiate.

The Dutch Franchise Act requires consultation between franchisor and franchisee at least once a year. Use those discussions to review the remaining term and upcoming investments as well. Record the conclusions, but do not confuse a meeting record with a formal contract renewal.

Practical conclusion: first choose an economically justifiable term, then draft the renewal provisions. Make sure both parties know when they need to act, which conditions apply and which investments remain financially sensible.