Franchise Renewal, Transfer or Exit: A Practical Guide for Franchisees Planning Their Next Move

If your franchise agreement is set to expire in the next six to twelve months, it is time to start planning your next move. In this scenario, you have three primary options available: renew, transfer, or exit. Each of these options comes with different benefits, limitations, and risks, so it is imperative to make an informed and strategic decision with your long-term best interests in mind.

For a franchisee, the expiration of the franchise agreement is a significant milestone. You’ve made it through your initial term (or renewal term), and now you need to decide what to do next.

When your franchise agreement is up for renewal, you have three primary options available. While seeking to renew is one option, now may also be a good time to consider pursuing a transfer. Alternatively, if pursuing a transfer is not viable and you are no longer interested in operating your franchise, it may be time to exit the system and move on.

What Are Some Key Considerations for Renewing a Franchise?

If your franchise agreement is set to expire and you are interested in continuing as a franchisee, you will need to go through the renewal process. Your franchise agreement almost certainly establishes a deadline for notifying your franchisor of your intent to renew—and you should be sure to meet it to avoid unnecessary issues. In addition to establishing notice deadlines, franchise agreements typically set several other conditions for renewal. Some common examples include:

• Being in full compliance with the franchise agreement (including royalty and other payment obligations)
• Remodeling or making upgrades to comply with the franchisor’s standards for new franchisees
• Signing the franchisor’s “then-current” franchise agreement
• Paying a renewal fee
• Waiving any claims against the franchisor that arose prior to the date of renewal

If you have a good relationship with your franchisor, going through the renewal process may be relatively straightforward. That said, you will still want to hire a franchise lawyer to review your new franchise agreement and any other agreements you are required to sign. If you don’t have a good relationship with your franchisor, renewing could prove more challenging, and you may need to rely on your franchise lawyer to enforce your franchisor’s obligation to handle your renewal request in good faith.

What is the Process for Transferring a Franchise?

If you have built your franchise into a saleable asset, transferring your franchise could be an option in this scenario as well. As with renewals, transfers are typically subject to several conditions, and franchisees must satisfy all contractual requirements to secure their franchisor’s approval. Some examples of common transfer conditions include:

• Being in full compliance with the franchise agreement and the franchisor’s current standards
• Complying with the franchisor’s right of first refusal
• Securing the franchisor’s approval of the proposed transferee
• Paying a transfer fee
• Waiving any claims against the franchisor that arise prior to the date of transfer

Franchisees interested in selling their businesses have a variety of options for identifying potential buyers (or transferees). Selling a business is a complex legal process in itself, so in this scenario, it is important to work with a law firm experienced in business acquisitions.

What Should I Know Before I Exit a Franchise System?

If you are not interested in renewing and transferring your franchise is not an option, your best move may be to simply let your franchise agreement expire. Before you exit the franchise system, however, there are some important considerations to keep in mind. For example:

• You will need to comply with your franchise agreement’s non-compete and non-solicitation covenants.
• If you are able to remain in your existing location and operate an independent business, you will need to completely de-brand and cease all use of the franchisor’s system.
• If you are not in full compliance with your franchise agreement, you could be at risk of facing post-expiration litigation or alternative dispute resolution (ADR).

With these considerations in mind, we recommend consulting with a franchise lawyer before you commit to exiting the system. If you have any claims against your franchisor, you may be able to leverage these claims to negotiate an exit on more favorable terms.

FAQs: Planning Your Next Move as a Franchisee

Is my franchisor required to renew my franchise if I satisfy my renewal conditions?

Your franchisor must comply with the terms of your franchise agreement—including respecting your right to renew. As a result, if you satisfy your franchise agreement’s renewal conditions, your franchisor must uphold its end of the bargain as well.

How does a franchisor’s right of first refusal work in a transfer scenario?

If your franchisor has a right of first refusal under your franchise agreement, you will need to offer your franchisor the opportunity to buy your franchise on the same terms offered to a prospective buyer. This presents some unique timing considerations and other challenges, so it is important to work closely with an experienced franchise lawyer during the process.

What are my options if I have a claim (or think I may have a claim) against my franchisor?

If you have a claim against your franchisor, you can pursue ADR in accordance with your franchise agreement’s dispute resolution provisions. Alternatively, you may be able to leverage your claim in renewal, transfer, or exit negotiations. Here, too, you will want to consult an experienced franchise attorney to ensure you make informed, strategic decisions.

How Our Firm Can Help

Our franchise lawyers have extensive experience representing franchisees in connection with renewals, transfers, and franchise terminations. We also represent franchisees in litigation and ADR. If you have questions about your options or your legal rights, we invite you to contact us for more information.

Schedule a Call with a Franchise Lawyer at Rendigs

To schedule a call with a franchise lawyer at Rendigs, contact us today. Call 513-381-9200 or tell us how we can reach you online to arrange a confidential consultation.