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Q.

At what point during a five-year franchise agreement should a franchisee begin to make a profit?

Author: John Pratt

answered by John Pratt

Senior Partner at Hamilton Pratt

The great majority of franchise agreementsin the UK are granted for five years. However, some franchises that involve very substantial initial investment last longer so that, for instance, a McDonald’s franchise agreement has a 25-year term. The reason for the longer term is that with many fast food franchises it takes substantially longer to recover the initial outlay in taking the franchise and building and then fitting out the premises than in 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 businesses.

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