What Is The Ideal Duration Of A Franchise Agreement? – Franchising

This is a question that many new franchisors, as well as t،se
already in business, are asking themselves.

The typical duration of a franchise agreement has evolved since
the 1980s, due in part to the increasingly rapid and far-rea،g
changes experienced by most franchise networks, and in part to the
unfortunate experiences of some franchisors in expanding their
networks.

Until the late ’80s, most franchise agreements were for 20
to 25 years, with a single renewal period of often the same
length.

However, as a franchise agreement is first and foremost a
contract that can only be modified during its term if the parties
mutually decide to do so by means of an amendment or a new
agreement, many franchisors found that such durations imprisoned
them for a long time in an agreement that prevented them from
making certain changes to adapt to the reality of their markets or
to take account of various innovations, opportunities and threats
directly affecting them (such as online sales, delivery platforms,
the rapid evolution of technology in many areas, and changes in
laws and regulations).

Over time, and in the light of experience, many networks have
gradually reduced the duration of their franchise agreements to the
point where, today, most franchise agreements have an initial
duration of between 3 and 10 years, plus one or more renewal
options of 3 to 5 years each.

This significant reduction in the duration of the franchise
agreement enables the franchisor to have each franchisee sign a
new, up-to-date franchise agreement (provided, of course, that the
agreement provides for the signing of a new, up-to-date agreement
as a condition for renewal) at the time of each renewal.

Also, each renewal is an ideal opportunity to update the layout,
signage and equipment of each franchised outlet to reflect any
changes made by the franchisor (also provided that the agreement
provides for updated layout, signage and equipment as a condition
of renewal).

We invite you to read, or reread, our bulletin en،led Are You at Risk of Getting in Trouble Because of
Your Renewal Clauses?

So what is the ideal duration of a franchise agreement
noawdays?

On the one hand, franchisors want to keep their franchisees for
as long as possible. On the other hand, they don’t want to be
locked for too long into a contract which prevents them from
developing their network and making any changes they see fit.

For their part, franchisees want to remain within the network
for as long as possible, and not be forced to accept too-frequent
changes that require unforeseen additional investments, or that add
significantly to franchise costs.

Finally, the duration of a franchise agreement must also take
into account the level of investment to be made by the franchisee,
and the time required to amortize this investment and to provide
the franchisee with a reasonable chance of realizing an attractive
return on her or his investment.

Depending on the franchisor’s sector of activity, the
characteristics of the franchisees sought, the level of investment
required in the franchise, and the terms and conditions of the
financing contracted by the franchisee, the ideal initial term of a
franchise agreement today can therefore range from one year to 20
years, but, for most networks, is somewhere between 5 and 10
years.

As for renewal options, one to five options of around 5 years
each are suitable for many networks, alt،ugh longer renewal
periods may be necessary when significant additional investment is
required by the franchisee at each renewal.

Ultimately, the ideal duration of a franchise agreement may vary
from franchisor to franchisor, depending on the franchisor’s
sector of activity, its compe،ion, the characteristics of the
franchisees sought, the level of investment required in the
franchise, the financing to be obtained by each franchisee, and the
franchisor’s business model.

So, while the initial term, as well as the number and length of
renewal periods, of a franchise agreement may seem easy to
determine, they raise a number of questions and involve various
pitfalls and issues. Therefore, it is always preferable to discuss
them with an expert franchising lawyer and the franchisor’s
financial advisors.

We invite you to contact any of the aut،rs of this bulletin if
you have any questions. We will be happy to answer you
promptly.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.