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What’s the usual length of a franchise agreement?
Most franchise agreements in the UK are granted for five years. A small minority are granted for 10 years and an even smaller minority are granted for longer periods such as 25 years. Longer periods tend to be granted by franchises such as McDonald’s, Burger King or KFC where there is a very substantial investment in property and where property is key, so that the lease of the property and the franchise agreement terminate at the same time. Franchisees are required to recover their costs in taking a franchise and make a return on their ‘investment’ before the expiry of the term. If, in the first year of operation, franchisees make a small loss, break even in the second year, make a small profit in the third year and then make more substantial profits in year four and five it would be unlikely that a franchisee would be able to recover his costs and make a profit if the agreement was to last, say, for three years. In addition to the initial term, franchise agreements should be automatically renewable, provided that the franchisee has performed its obligations under the franchise agreement. The British Franchise Association likes to see two guaranteed automatic renewals when a five-year term is granted and one when a 10-year term is granted. At the end of this period, even if a franchisee does not have an automatic right of renewal, franchisors will renew a franchisee who is performing well.
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