For the term of his natural life – NOT

The key thing about a franchise is that it is a conditional grant for a limited period of time – not a lifetime entitlement. It’s a bit like political office really.

A state government inquiry into franchising in Western Australia has been triggered in part by a large franchisor (Yum Restaurants, owner of KFC) not offering to renew the franchise agreement of one of its franchisees (Jack Cowin’s Competitive Foods), not withstanding the franchisee’s claims that the store is profitable, and has become something of a local icon after 20 years.

The substance of the arguments for and against both sides of this issue will no doubt be tested in a different forum, but it does serve to highlight the limited lifespan of a franchise.

Unlike Marcus Clarke’s convict character Rufus Dawes, who was wrongfully convicted of murder and transported to Australia “For the Term of his Natural Life”, franchisees can and should not expect that their franchise agreements will last as long as the sentence meted out to the unfortunate convict.

In fact the Franchising Australia Survey 2006 confirmed the findings of previous surveys that the average term granted to a franchisee in Australia is five years, usually with an option to renew for a similar period at the franchisor’s discretion.

This means that, all else being equal, the franchisee can expect to operate their business for at least five years, but without an ironclad guarantee of anything beyond that. Of course different franchisors apply different terms, but five years is the average.

That means five years for a franchisee to get their investment back, plus an adequate return and working wage or salary to justify the whole venture. Any extension to the term after that is a bonus – not a guarantee or an entitlement.

Franchisors may not renew franchises for any number of reasons. Perhaps the franchisee has not been compliant during the course of the first term. Perhaps the franchisor is changing its business model and the franchisee is not willing to upgrade or refit the business in keeping with the new model.

Or perhaps the lease can’t be renewed, or only renewed at such an extortionate rent that the franchisor has no choice but to end the franchise after one term rather than allow the franchisee to go broke in a second term.

Whatever the reason, the key thing about a franchise is that it is a conditional grant for a limited period of time – not a lifetime entitlement.

It’s a bit like political office really. Politicians are voted in by their electorates for a three or four year term, and then have to face re-election at the end of their term to get the job again for another three or four years. If political office was a lifetime entitlement, we’d have the same politicians forever – and we’d all want that, wouldn’t we?

Jason Gehrke has a passion for franchising. He has been involved in the sector for 17 years as a franchisee, a franchisor, provided PR and marketing services to more than 30 leading Australian franchise systems, and presented to literally thousands of potential franchisees and franchisors over the years. He is a director of the consultancy Franchise Advisory Centre and is the immediate past CEO of automotive paint and plastic repair franchise, Kwik Fix International, a 2004 Australian Franchise System of the Year winner.