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Renewals and Terminations of a Franchise Business

Renewal of the contract

Any American franchise business agreement is valid for a limited time only, and the valid time period is mentioned in the franchise agreement. At the end of the current period, both franchisor and franchisee have the right to continue to run the business or not. The franchisor and franchisee may agree to re-validate the old contract or write a new contract with modified terms and conditions. There is no guarantee from the franchisor that the business franchise contract will be renewed at the end of the term and at a same the there is no obligation for the franchisee to continue to do business with the same franchisor. The franchisee has every right to take out that brand at the end of the term and get a new brand or run their own brand business.

Reason for non-renewals by the franchisor

  • The franchisee may not pay fees in a timely manner
  • Franchisee unable to maintain the franchisors standards and codes
  • Self competition
  • Low performance of the franchisee
  • Malpractice by the franchisee
  • Violations of business licenses and permits
  • Mismanagement
  • Franchisee doesn’t accept franchisers new terms
  • Franchisors run out the business
  • Government restrictions

Cancellation or withdrawal of the franchisee from the franchising business

  • Unprofitable
  • High amount of royalties
  • No effective marketing
  • Decreased sales
  • Decreased profit margins
  • Sales restrictions
  • Decrease in territory
  • No support from the franchisor
  • Franchise has outdated products
  • Franchisors run out the business
  • Better benefits from other franchisors
  • Breach of franchise agreement by the franchisor

There are other causes, however these are the common reasons why franchising business agreements are canceled or terminated at the end of the contract period.

Renewal fee

The franchise will charge a one-time lump sum fee to renew or rewrite a franchise agreement. Both parties can negotiate the contract terms and conditions. The franchisee has to pay the renewal fee and such a fee will be set by the franchisor. This fee is valid for the new contract period. Both parties have the right to negotiate new terms and conditions for all matters concerning the franchising business. Some franchisors may not charge the renewal fee in order to encourage operators or to give an incentive to the operators; hence this fee is at the sole discretion of the franchisor.

Early termination fee/Liquidated damages fee

This is a one-time fee if the franchisee decides not to run the franchising business and terminates the franchising business agreement before the end of the contract period. The franchisor has to right to charge a fee for early termination or liquidated damages. The amount of the fee varies from franchisor to franchisor.

If you want to know more about franchise business renewals and termination clauses, have a question on how to renew a franchise business, or need assistance to terminate a current business, please contact us at help@bizworldusa.com or 415-234-8833 and one of our approved franchise business consultants will contact you.