Q:
I've been looking at a number of franchises and finally found
one I like, but I have an issue with the franchise agreement. This
contract only allows franchisees to own the franchise for 20 years.
What happens after that?
A: The
key comment in your note that's causing the confusion is,
"This contract only allows franchisees to own the franchise
for 20 years." It might be helpful in answering your question
for me to explain the actual legal arrangement underlying a typical
franchise license agreement since you won't actually
"own" any part of the franchise. All you'll own are
whatever tangible assets you purchase for the operation of the
business.
There is a common misconception that when you execute a
franchise agreement you are "buying" something. This is
not the case. It is a license agreement, and you are paying the
franchisor consideration (usually expressed in terms of both
initial and ongoing fees) in exchange for access to the brand and
operating systems of the franchise company for a fixed period of
time.
Content Continues Below
In this regard, the franchise agreement is much like a lease you
sign to rent office space for a fixed period of time in exchange
for rent and other payments you agree to make. After the lease term
(and any renewal options) expires, you lose any continuing right to
occupy the property. During the time you occupy the property, you
don't actually "own" it-you're just paying to use
it. You do, however, "own" the desks, chairs, computers
and other stuff that you furnish the office with.
The agreement you are looking at probably contains very specific
language stating that the ownership of the brand, trademarks and
operating system of the franchise stays totally with the franchise
company. This is true in virtually all franchise agreements. Many
franchise agreements also contain renewal provisions that extend
the original term of the agreement if certain conditions are met by
the franchisee.
It is extremely rare to find a franchise agreement that has an
indefinite term. Normally you have the original term and perhaps
some stipulated renewal options (the majority of these agreements
cover a period of about 20 years in total), and then that's the
end of it as far as any guarantees are concerned.
This raises the obvious question you brought up of what happens
at that point. The logical move for any franchisor (assuming the
franchisee is running the business well and paying their bills on
time) is to continue renewing the agreement for additional periods
beyond what is contained in the contract. This is what happens in
most franchise systems. Even though this is logical, it is not
required of the franchisor or guaranteed to you.
If the franchise company decides not to continue the
relationship with you beyond the term they have committed to, you
certainly have the right to dispose of the assets that you actually
own in the business, but the franchise agreement is not one of
those assets. Beyond that, under the terms of most franchise
agreements, you're out of luck.
When you are evaluating a franchise under these terms, it is
important that you look at the total investment and the projected
return for the period that you know the business will be allowed to
operate and make sure that these numbers are acceptable to you. If,
for example, you feel that the investment will be about $100,000
and the total return from operating the franchise over 20 years
will be $2,000,000, you may very well decide that this is a
wonderful deal regardless of what happens in 20 years, so
you'll go forward.
If you feel that the agreement must extend beyond the
specified term in order to be acceptable to you, you should not
pursue that franchise. Keep in mind that if you are a good
franchise operator who abides by the established systems and pays
bills on time, you'll probably be renewed without issue in most
systems.
Jeff Elgin has almost 20 years of experience in franchising,
both as a franchisee and senior franchise company executive. He is
currently the CEO of FranChoice
Inc., a company that provides free consulting to consumers
looking for a franchise that best matches their needs. He can be
reached at jelgin@FranChoice.com.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.