Your franchise agreement is about to expire. Now what?
This is one of the most consequential decisions you'll make as a franchisee. Yet it rarely gets the attention it deserves until the renewal deadline is staring at you in the face.
That’s why I want to walk through this decision methodically before the pressure is on.
Top Factors in Determining If You Should Renew Your Franchise - A positive review of your financials - A solid relationship with your franchisor - Continued faith in the brand's position within the market - Belief that you have the required energy to last through the next term - An overall fit with your personal life situation |
The Numbers Don't Lie
Start with your financials. Pull out your profit and loss statements from the past three years.
Are you making money? I’m talking about real money, not just breaking even.
The best way to run your numbers is to compare your actual performance to what you projected when you first bought the franchise. If you're consistently underperforming, that's a red flag. If you're exceeding projections, that's worth noting too.
Calculate your actual return on investment. Include everything; your initial franchise fee, buildout costs, equipment, working capital, and all the royalties you've paid over the years.
The question isn't whether you're profitable. It's whether this franchise is delivering the returns you wanted it to.
What is Your Relationship with Your Franchisor?
Business is personal, especially in franchising.
Ask yourself these questions:
- How has your franchisor treated you over the years?
- When you needed support, did they provide it?
- When problems arose, did they help solve them or hide behind corporate policies?
Next, check your franchise renewal agreement carefully. Franchisors often update terms when you renew. You may face different royalty rates, increased marketing fees, or new technology requirements.
In addition, many franchisors charge renewal fees. These can range from a few thousand dollars to $10,000 or more. Sometimes renewal is contingent on remodeling your property or other requirements.
These aren't necessarily dealbreakers. But you need to know what you're signing up for this time. You need to ask yourself what you’re getting in exchange. Sometimes, it's just the privilege of continuing under the same brand.
And talk to other franchisees who recently renewed. What surprised them? What has changed? Their experiences offer valuable insights into what's coming your way.
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How Has Your Market Changed?
Your territory looked different ten years ago or however long ago you began your term.
New competitors have probably entered your market. Consumer preferences have shifted. Economic conditions have evolved…have changed
Is your franchise concept still relevant? Some brands adapt beautifully to changing markets. Others become outdated relics. That wouldn’t be good!
One thing you can do is drive around your territory with fresh eyes. Look at the new businesses that have opened. Notice which concepts, franchised and not, are thriving and which are struggling.
In some cases, your brand might be losing market share even if you're personally doing well. And unless your business is thriving and changing with the times, that's a warning sign for the next decade or however long your next franchise term is.
Your Personal Situation
Consider where are you in life?
If you're five years from retirement, a 10-year renewal might not make sense unless you plan to sell the business. If you're building long-term wealth, renewal could be your best option.
Has your passion for the business changed? As you know, franchise ownership requires enthusiasm and energy. If you're burned out, another 10 years may be too constraining for you.
Consider Your Alternatives
If you’re in a good position, maybe it’s time to take your profits and retire.
If that isn’t appealing, is there a way for you to stay involved in the world of small business and make a living doing it, like consulting?
Have you thought about lending your business expertise to others? If so, you can apply to be a SCORE Mentor.
What about volunteering your time for a cause you care about?
As you can see, you have options.
Making Your Decision
This isn't a choice between good and bad. It's a choice between your different paths for your future.
Set aside your emotions and evaluate your decision based on facts. Your franchise is a business investment, not a marriage.
If the numbers work, the relationship is solid and the brand has a strong future, renewal makes sense. If any of those elements are broken, it's time to explore your exit strategy.
At the end of your term, you've earned the right to make this decision on your terms. Choose wisely.
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This post was written by The Franchise King®, Joel Libava. He is the author of two books on how to buy and how to research a franchise and advises people looking to make a smart decision on a franchise to own.