Buying a franchise: check your right to renew the agreement

Buying a franchise makes you part of a network, but your right to operate under its business concept is time-limited. A clause offering the “possibility of renewal” is not the same as a guaranteed right to continue. Before signing, you need to understand who decides on the next contract term, what conditions apply and how that uncertainty affects your purchase.

1. Distinguish a right to renew from a fresh negotiation

Start by reading the contract term and renewal provisions together. Highlight the expiry date, any notice periods and what happens if neither party takes action. Do not assume that a successful working relationship will automatically continue.

There are important differences between the various types of wording:

• Automatic renewal: the agreement continues unless notice is given in accordance with the specified rules. Check who can give notice and when.
• Conditional right to renew: you can continue if specified requirements are met. It must be possible to verify whether those requirements have been satisfied.
• Renewal by mutual agreement: both parties must agree to continue. You therefore have no unilateral right to insist on renewal.
• A new agreement on the terms applicable at the time: continuing the relationship may require you to accept different contractual terms.

Ask the franchisor to explain which model applies and identify the relevant provisions in the agreement. A verbal assurance that “we usually always renew” is no substitute for a contractual provision. If renewal is crucial to your purchase, that should also be reflected in the written agreement.

2. Make sure renewal requirements can be verified

A requirement to have complied with the agreement may sound straightforward. Difficulties arise if every minor breach can be used to refuse renewal, or if the assessment relies on vague expressions such as “satisfactory performance”.

Ask for answers to the following questions:

• What specific circumstances could prevent renewal?
• Must a breach be material, or could a minor departure from the requirements be enough?
• Will you receive written notice of a breach and an opportunity to remedy it?
• What period will be assessed, and what evidence will be used?
• Who makes the decision, and by when must you be notified?

Try to have the procedure set out in the agreement, not just in a presentation. If performance results or quality checks affect the decision, the measurement method also needs to be clear. Ask specifically how breaches that have already been remedied will be treated.

Also check how a renewal request must be submitted. If a particular written notice must be sent to a specified recipient, keep a record of both its contents and proof of receipt. Set an internal reminder well ahead of the contractual deadline.

3. Base your calculations on the term you have actually secured

Split your financial projections into two parts: the contract term that is already binding and a possible continuation. The first part should not depend on the franchisor choosing to agree to renewal later.

Prepare a cash flow forecast for the secured term. Show when start-up costs will be paid, when the business is expected to generate a surplus and what loan repayments will remain at the end of the term. If recovering your investment requires another contract term, that is a key risk to discuss with both your advisers and your lender.

Then prepare a separate forecast for renewal. Find out whether it involves a new fee, revised financial terms or a requirement to sign an entirely new agreement. Ask for written information explaining how those terms will be set and when you will have the opportunity to consider them. A future price that has not yet been set should be treated as uncertain, not assumed to remain unchanged.

If you are buying an existing franchise business, you must also establish whether you will take over the remaining contract term or receive a new one. The seller’s time in the network tells you nothing about how long you will be entitled to continue. Make sure the purchase terms reflect the agreement actually being offered to you.

4. Understand the legal protections and their limits

Sweden has specific legislation: the Act (2006:484) on Franchisors’ Duty to Disclose Information. The franchisor must provide clear, comprehensible written information in good time before the agreement is entered into. This must cover, among other things, the contract term and the conditions for amendment, renewal and termination. The disclosure duty also applies when a franchise agreement is transferred to a new franchisee with the franchisor’s permission.

However, the Act does not itself grant an automatic right to renewal. Nor does it impose a general duty to provide fresh pre-contractual information every time an existing franchise agreement is renewed. You should therefore request a complete draft agreement and a clear summary of changes before the next term.

General contract law, including the Swedish Contracts Act (1915:218), is also relevant. Have a lawyer with franchise experience assess any unclear or far-reaching renewal conditions before you sign. Do not rely on a subsequent legal challenge as a substitute for clear terms at the outset.

Practical conclusion: Base your purchase on the contract term you actually secure. Insist on clear renewal requirements, documented deadlines and an explanation of how the next term’s conditions will be set before committing capital.