Field guide
Renewal clauses before you sign
Year ten feels far away on signing day. The renewal clause decides what that year costs, so it deserves a slow read now.
Read the renewal clause on day one
Most buyers we sit with read the fee schedule twice and the territory map three times. The renewal clause gets a quick glance, usually somewhere between the restraint of trade and the dispute section, when everyone is tired and the coffee has gone cold. That is a pity, because the renewal terms settle whether the business you build for ten years is still yours to run in year eleven, and at what price.
A renewal is rarely a simple extension. In many South African agreements the franchisor may ask you to sign whatever their current standard agreement looks like at the time, with new royalty rates, new marketing levies and new rules. The clause you sign today only promises you the right to ask, under certain conditions. Knowing those conditions early lets you plan for them instead of being surprised by them.
The four things to find in the clause
Take a highlighter and look for these, in this order. If any of them are missing or vague, write it down as a question for the franchisor before you go further.
- The notice window, meaning the exact months in which you must tell the franchisor you want to renew
- The conditions, such as being up to date on fees and having no open breach notices
- Refurbishment duties, often called a refit or reimage, and who decides the scope
- The renewal fee and whether you sign the then current agreement or keep your existing terms
The notice window is the one that catches people. Some agreements ask for written notice between twelve and six months before expiry. Miss it by a week and the franchisor may be entitled to let the agreement lapse, even if your store is one of the best performers in the region.
Refits are the real renewal cost
The renewal fee itself is often modest, while the refit usually costs far more. A franchisor that has changed its look over a decade will usually want your site brought up to the new standard before the next term starts, and that can mean new signage, new counters, new equipment and sometimes a new layout. For a retail or food site in a Gauteng mall that bill can easily rival what you spent on the original fit out.
Ask how the refit scope is set and whether there is a cap. Ask whether a partial refit done in year six counts toward the renewal standard. Ask for two or three real examples of recent renewals in the network and what those operators spent. A good franchisor will have these numbers and wont mind sharing them in broad strokes. If the answer is a shrug, put a conservative number in your own model and build a refit reserve from year five.
Matching the lease to the agreement
A renewal right on paper means very little if your lease ends two years earlier. We see this alot with sites in strip centres where the landlord offered a five year lease with one option, while the franchise term runs ten. Line up the dates on one page. The franchise term, the lease term, any lease options and the renewal notice window should sit next to each other so you can see the gaps. Lease options and escalations are set out in landlord packs decoded.
Finance follows the same logic. If your bank loan or equipment finance runs on a seperate schedule, check that the last instalments do not land in the same year as a big refit. That double hit is how decent operators end up selling at the wrong time.
What to ask before you sign
Keep the list short and written. Ask the franchisor to confirm the renewal fee as a number or a formula, the expected refit scope, whether you keep your current royalty rate, and what happens if they decline to renew. Its also worth asking whether renewal terms have changed for existing operators in the last few years, because that tells you how the network treats people at the end of a term.
Then read this alongside exit thinking early and asking better fee questions, since renewal, exit and fees are really one conversation spread over ten years. If you would like a second pair of eyes on a specific clause, send the relevant page and your dates through our contact form and Heinrich will go through it with you.
Check your renewal terms with us
Have Heinrich read your renewal clause and lease dates side by side: share the pages through our contact form.