Deciding How Long Your Franchise Agreement Should Last
This morning‚ in speaking with a client regarding the development of her franchise system (a system based on a well tested and unique service and business model) we discussed what the right franchise "term" should be‚ i.e.‚ should the franchise agreement be for 5 years‚ 7 years‚ 10 years or some other length of time. For her franchise model we ultimately concluded that 7 years was the right length of time.
When establishing a new franchise system issues such as the length of your future franchise agreement – the "term" – should involve an assessment of:
The Economics When deciding the length of time that your franchise agreements should last (i.e.‚ the franchise agreement term) consideration should be given to the economics faced by your franchisees. That is‚ consider your franchisees overall investment in paying you a franchise fee and investing in the establishment of the franchised business. How much time will it take the franchisee to recoup such investments and provide the franchisee with a solid chance at earning a great return on investment; and
Your Franchise System Goals Consider the goals that you will have for your franchise system and the types of stability and growth that you would like to achieve.
As a potential franchisor‚ you must discuss with your franchise lawyer the start up costs that will be incurred by your prospective franchisee‚ the potential for profits and a sufficient time period for the franchisee to generate an acceptable rate of return. Just selecting an arbitrary time period (2‚ 5‚ 10 or 15 years)‚ without any further analysis‚ may result in a mistake that shortchanges either yourself or your franchisees.