Franchise agreements may vary, but most of them follow a set of fairly standard terms. What are these terms and what happens if things change?
Standard Franchise Terms in Canada
- Initial Term: Most agreements run 5-10 years, and are often tied to the lease on the location.
- Renewal/Extension Options: Some agreements allow renewal for additional terms (e.g., another 5 or 10 years), but this is subject to conditions like being in good standing, paying a renewal fee, following operational standards and updating your location to current brand standards.
- Operational Standards: Franchisees must follow the franchisor's system, including branding, suppliers, marketing, and operating procedures.
If You Want Out Early
- Termination by Franchisee: Most agreements don't allow you to simply walk away. Ending early can mean serious penalties-you may be liable for unpaid royalties, lease obligations, and damages for breaching the contract. Be sure that this is spelled out in your agreement before signing.
- Termination by Franchisor: If you breach the agreement (e.g., non-payment, brand violations), the franchisor can terminate your agreement. You may lose your rights to operate immediately, and you may be subject to non-compete restrictions. You should be sure to look for conditions and penalties for this in your agreement.
Extensions or Renewals
- Extensions are usually written into the agreement as an option, not a guarantee, and they must be agreed to by both parties.
- Conditions often include: no defaults under the current agreement, signing the franchisor's then-current agreement (which need to be reviewed as they may have new terms), and an obligation to renovate or modernize the business.
If You Retire or Want to Sell before the end of your term
- Transfer Rights: Many agreements allow you to sell your franchise to a new franchisee - as long as the franchisor approves the new buyer.
- Conditions may include:
- The buyer must meet the franchisor's financial and operational qualifications.
- You may have to pay a transfer fee.
- The buyer usually has to sign a new franchise agreement, not take over your old one.
- Right of First Refusal: Some franchisors reserve the right to buy your business themselves before you sell to a third party. This would be written into your contract.
- Retirement: Retirement is treated the same as other exits-you'll need to transfer or wind down the business according to the agreement. If you are getting to an age where there is a possibility of retirement, either in your first term or an extended term, be sure that the options are written down and agreed to in advance, and that you will have the ability and support to sell or wind down when the time comes.
👉 Key takeaway: Franchise agreements are designed to protect the brand, so exiting early can be costly and complicated. Renewal and sale/transfer rights come with conditions, and generally need franchisor approval. Work with your legal counsel to make sure that it is spelled out in your agreement to avoid misunderstandings and frustration in the future.