Despite the often significant financial investment of buying into a franchise business opportunity, you need to realise you’re only guaranteed the franchise unit for the term of the franchise agreement.

In Australia the average franchise agreement term is five years.

At the end of the franchise term you may not get the opportunity to renew for a further term.

Franchise agreement, return on investment and due diligence

This means when investing in a franchise you need to consider whether you’ll be able to get a return on your investment during the franchise agreement term.

If your franchise is a retailed-based business there is also no guarantee that you’ll get to continue your lease after the lease term, which is usually signed for the same period as the franchise agreement.

It’s important to consider these elements in your due diligence before joining a franchise business and signing a franchise agreement.

Franchise agreement renewals

Our Franchising Australia studies show the average length of time a franchisee spends in a franchise is seven years, so with an average five year franchise agreement it’s possible your agreement will be renewed — but no guarantees.

Take the recent 2008 KFC example in Western Australia.

After a 20-year franchise agreement, the KFC Parent company Yum wouldn’t renew the franchise agreement, despite its profitability and the franchisee’s long association with the brand and multiple stores.

Recent franchise regulation reforms in Australia, announced at the end of 2009 now require franchisors to notify franchisees six months out from the end of the franchise agreement whether they intend to renew the agreement for a further term.

Just what impact this will have is still unknown and again there are no franchise agreement renewal guarantees.

If your franchise agreement is renewed it's also possible the agreement terms may change.  You need to be prepared for this and may need to negotiate with your franchisor.  Again, you should get professional advice before signing the new franchise agreement.

At the end of the franchise agreement

There are also other aspects beyond the length of the franchise agreement that need to be considered.

For example, if the franchise relationship was to end who owns the franchise-specific equipment and products, and what limitations are attached to their sale and use beyond the franchise agreement term?

Before entering a franchise, it’s important to read the franchise agreement carefully and it’s recommended you seek professional advice from a franchise lawyer before signing.

Other franchise myths

• Franchise myth #1: Buy yourself a job
• Franchise myth #2: Be your own boss
• Franchise myth #3: Franchising is less risky
• Franchise myth #4: Franchising is an easy lifestyle
• Franchise myth #6: Franchises are cheaper than independent business