Does a franchisee buy a franchise for a limited time period only?

John Pratt writes:

The short answer is yes. While it is, in theory, possible for a franchise to be granted in perpetuity, it would make no sense for either a franchisor, who may be stuck with a franchisee who was underperforming, or a franchisee who may, after a period of time, want to retire.

In the UK, the majority of franchise agreements are granted for five years. Some are granted for 10 years and very expensive (in terms of initial investment) franchises are granted for the duration of the lease of the premises, which is normally 25 years.

The reason a five-year term is popular is that there are provisions of UK/EU competition law that enable restrictions to be imposed for five years, but not longer. Therefore, franchisors tend to choose a five-year period, provided it’s long enough to enable a franchisee to recover their investment.

Usually when a five-year term is granted, the agreement envisages two automatic renewals, provided the franchisee has performed properly under the franchise agreement. So in effect it would last for 15 years and at the end of that period there would be nothing to stop the franchisor from renewing.

If a 10-year term is granted, you would normally expect one renewal term.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.