The great majority of franchise agreements in the UK are granted for five years but some franchises which involve very substantial initial investment last longer so that, for instance, a McDonald’s franchise agreement has a twenty five year term. The reason for the longer term is many fast food franchises is that it takes substantially longer to recover the initial outlay in taking the franchise and building and then fitting out he premises than with the majority of franchise agreements.
The general rule of thumb is that franchisees make a substantial loss in the first year, make a much smaller loss/break even in the second year, make a small profit in the third year and make larger profits in the fourth and fifth year. Then, of course, franchisees have (or should have) the automatic right to renew subject to the conditions in the franchise agreement having been met so that they are able to continue to operate their profitable business.
Franchisees should always ensure that there is sufficient profitability in the franchise that they are taking to enable them, at the very least, to recover all of their initial costs before the expiry of the first term. If that is unlikely to be the case then that means that the term may not be long enough.
Written by: John Pratt
Partner, Hamilton Pratt