The term, renewal and transfer provisions of a franchise agreement are often overlooked by prospective franchisees. Many people focus on getting into the business but how you get out is just as important. Therefore these provisions must be reviewed carefully.
The term of the franchise agreement determines how long the franchisee will be authorized to carry on using the franchisor’s system and trademarks. Normally the term is for a specified number of years (for example 5, 10, or 15 years). The length of the initial term usually varies by industry practice, the initial investment required and the nature of the franchise business.
In most cases, the franchisor will offer the franchisee a right to renew for another specified term. The renewal period may or may not be the same as the initial term. Some franchise agreements provide only one renewal term while others will provide multiple or an unlimited number of renewal terms. Certain conditions must usually be met in order to renew. Generally, the franchisee must not be in default on any provisions of the franchise agreement including royalty and advertising payments. At the time of renewal a franchisee is typically asked to sign the then current franchise agreement (which may include higher royalty payments and updating your location). The franchisee is usually expected to provide a release for any potential claims against the franchisor for anything that occurred during the initial term. The franchisee is generally required to pay an additional fee in order to renew.
Generally, there are no restrictions on whether the franchisor can transfer or assign the franchise agreement. The franchisee, however, is often restricted in transferring or assigning the franchise agreement to another unless certain conditions are met. The franchisee’s ability to sell or transfer a franchise agreement will usually be subject to obtaining the consent of the franchisor. A potential buyer must fulfill the requirements set forth by the franchisors including financial stability and training. A franchisee who owns the rights to multiple franchises should also pay particular attention to whether the agreement requires the franchisee to develop all of the locations before the franchise rights can be assigned or sold. The franchise agreement may also contain a right of first refusal provision which allows the franchisor the opportunity to buy the franchise at the price offered by another buyer. Like the renewal provision, the franchisee is generally required to pay a fee in order to transfer the franchise rights.
Iowa law does provide some protection regarding renewal and transfer provisions which a franchisor cannot force a franchisee to waive. See Iowa Code sections 523H.5 and 523H.8