Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Walking Away from Renewal Contracts
Transcript
- Lucas: So we talk a lot on this show about people getting into franchises — the upfront costs, the training, the site selection. But there's a flip side that's been getting more attention inside the industry lately: the growing number of franchisees who choose not to renew when their initial agreement expires. Luna: Yeah, I've seen some chatter on that. It feels counterintuitive — if you've already built a successful unit, why walk away? Lucas: Right, and that's exactly the puzzle. So here's the broad number: according to the 2025 Franchise Business Economic Outlook, non-renewal rates ticked up to about 12 percent across all sectors. That's up from roughly 7 percent ten years ago. It's not a crisis, but it's a meaningful shift. Luna: And I'm guessing it's not the underperformers leaving. The people walking away are often the better operators. Lucas: Exactly. Let me give you a concrete case. There's a multi-unit franchisee in the Midwest — I'll keep the brand anonymous, but it's a major quick-service chain. He had eight locations, all profitable, and he'd been with the system for fifteen years. When his initial twenty-year term came up for renewal, he looked at the new contract and decided not to sign. Luna: What was in the new contract that made him balk? Lucas: Three big changes. First, the royalty rate was going from 6 percent to 8 percent. Second, the franchisor was introducing mandatory supply chain sourcing that he estimated would add about 3 percent to his cost of goods sold. And third — and this was the dealbreaker — they removed the territorial protection clause, meaning the franchisor could open another location within his trade area without his consent. Luna: So it wasn't one thing. It was a compound effect that ate into his margins and introduced new risk. Lucas: Exactly. He ran the numbers: his average unit did about $1.2 million in revenue annually. The royalty increase alone cost him an extra $24,000 per location per year — that's nearly $200,000 across eight units. Add the supply chain cost, and he's looking at a hit of about $400,000 a year to his bottom line. And with no territorial protection, there's no cap on how much more competition the franchisor could authorize. Luna: That's a tough pill to swallow. But couldn't he have negotiated? He had eight profitable locations — surely he had leverage. Lucas: He tried. He proposed a five-year renewal instead of ten, or a phased royalty increase. The franchisor wouldn't budge. Their position was: these are the standard terms for all renewals in this region. Take it or leave it. And he left it. Luna: So he just closed eight locations? Sold them? Lucas: He sold six of them to a new franchisee who was willing to sign the new terms, and he shut down two that didn't have a buyer. He took a payday on the sales — reportedly about $300,000 per unit — and walked away with cash. But he also walked away from a business he'd built for fifteen years. Luna: And now he's doing what? Just retired? Lucas: No, actually, he took that capital and opened an independent fast-casual concept in the same market. He told Franchise Times that he'd rather take the risk of building his own brand than operate under terms he couldn't control. And he felt the franchisor's shift in philosophy was about squeezing more revenue from existing operators rather than growing the network. Luna: That's a pretty sharp indictment. But is this a pattern, or just one guy's story? Lucas: It's becoming a pattern. I spoke with a franchise consultant who works on resales, and she said the number of non-renewal inquiries has doubled in the last three years. She estimated that roughly one in four multi-unit operators with expiring contracts is at least considering walking away. The common threads are almost always royalty increases, loss of territory protection, and more restrictive supply chain requirements. Luna: And what's driving the franchisors to push these terms? I mean, they're not stupid — they must know they risk losing good operators. Lucas: Several factors. One is that the franchise market has matured — there are more potential franchisees than ever, so franchisors feel less dependent on renewals. They can recruit new blood. Another is private equity influence: many large franchise systems are backed by PE firms that want to maximize royalty revenue and system-wide growth. Tightening terms on renewals is a quick way to boost EBITDA. Luna: So it's a short-term profit play that might hurt the long-term health of the network. Lucas: Potentially. Because here's the thing: the best operators are the ones who know their numbers and have options. They're the ones most likely to walk. If you lose them, your average unit economics might actually decline. And then you're recruiting less experienced franchisees who might not survive the learning curve. Luna: That's the real risk. The network gets diluted. And for someone looking to buy a franchise today, what's the takeaway? Lucas: Read the renewal terms before you sign the initial agreement. Most franchise disclosure documents include the standard renewal contract as an exhibit. Look for three things: what's the royalty rate at renewal? Is there a cap on how much it can increase? Is territorial protection preserved? And are there any new obligations — like required technology upgrades or supply chain mandates — that kick in at renewal? Luna: So you're really negotiating the renewal at the same time you negotiate the initial deal. That's a smart way to frame it. Lucas: Exactly. Because once you're in the system for ten or fifteen years, your leverage is actually lower than you think. The franchisor knows you've invested time and money, and they're betting you won't walk away. But more franchisees are proving that assumption wrong. Luna: It makes me wonder if we'll start seeing more franchisee associations pushing back on these terms collectively. Lucas: We're already seeing that. There's a growing number of franchisee advisory councils that are negotiating system-wide term changes. And some brands — like Whataburger and In-N-Out — have actually kept renewal terms very friendly because they prioritize long-term operator relationships. But those are the exception. Luna: And for the brands that don't? The ones that push too hard? Lucas: They risk a slow erosion. If your most profitable franchisees start leaving, the system's average unit volume stagnates, the brand's reputation among lenders declines, and eventually the whole network becomes less attractive to new capital. It's a death by a thousand cuts. Luna: Speaking of things that can erode if not supported — the show itself runs on listener support. If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going. Lucas: Yeah, we keep it ad-free by design, and it's listeners who make that possible. You can find us at buy me a coffee dot com slash fexingo. No pressure, but every bit helps keep the lights on. Luna: And it really does add up. We're grateful for the community that makes this work. Lucas: So back to the trend — I think the bottom line is that renewal terms are becoming a more active part of franchise negotiations on both sides. If you're a prospective franchisee, don't just model year one. Model year fifteen. And if you're a franchisor, maybe think twice before squeezing your best operators. The cost of losing them might be higher than the extra royalty revenue. Luna: It's a good reminder that in franchising, the relationship is the asset. And relationships need to work both ways. Lucas: Exactly. That's the thread we'll keep pulling on in future episodes.