Prospective franchisees can always negotiate their franchise agreements, even if the franchisor seems to carry all the negotiating power. Franchise agreements aren’t negotiated in a vacuum.
Power, leverage, laws, relationships, and business smarts all create the general negotiation dynamics. Here’s are some general considerations that affect the success of a franchise agreement negotiation.
- Don’t sign agreements without negotiating. Be cautious of a salesperson who says the franchise agreement is non-negotiable and pressures you to sign on the spot. While there are limitations on what a lawyer is going to be able to obtain for the client, there will always be provisions in a franchise agreement that are negotiable, and will typically justify any legal fee incurred.
- Negotiate extensions. When you’re working on a new project, it is critical to negotiate extensions in writing. It’s important to understand the development process and the timing of the franchise agreement so you don’t trigger any extension fees that will make you beholden to the franchisor.
- Know that franchisors reserve the right to make company-wide decisions. Franchise agreements typically include language stating that all decisions the franchisor makes will be made in the best interest of the franchisor and the company as a whole. However, you may be able to obtain certain waivers and a protracted period of time to construct any required changes when the franchisor makes a company-wide change that affects your franchise.
- Pay close attention to the fees section of the franchise disclosure document.The FDD requires that all fees are disclosed and summarized in a tabular presentation. Watch out for miscellaneous fees, in addition to the standard royalty, marketing, and reservation fees.
- Limit the amount of requested changes. Try to have as few requested changes as possible to the contract, reserving them mainly for the issues that are negotiable. There is a chance in all franchise negotiations that if you go back to the franchisor with too many requests, then they may reject them all.
- Fee and Royalty considerations: If royalties are based on sales, you should only agree to pay a percentage of net sales, instead of gross sales. It would be beneficial to minimize any interest payable on past due amounts.
- Confidentiality considerations: While negotiating the franchise agreement it is crucial to limit overly burdensome or broad restrictions on the use and protection of the franchisor’s confidential information, including any post-term obligations.
- Assignment: Prohibit the franchisor from unreasonably withholding, delaying or conditioning consent to assignment. Seek authority to transfer interests to or for the benefit of affiliates or family members for restructuring or estate planning purposes. Allow transferability of existing franchise agreements (rather than require a transferee to enter into new agreement with franchisor).
- Termination: Allow the franchisor to terminate the default only after the franchisee has had the opportunity and failed to cure the default. Seek right to terminate all or part of the franchise agreement, such as the non-compete or non-solicitation provisions, if the franchisor: breaches the agreement; fails to comply with applicable law; or files for bankruptcy or becomes insolvent. If default triggers a right of franchisor to purchase the business, demand fair market value for the franchised business.
Most importantly, talk to current franchisees. See what it is like dealing with a franchisor on a regular basis. Does the franchisor actually provide what it is obligated to under the franchise documents?
When considering the scale and complexity of most franchise agreements, it’s worth hiring an attorney to review a proposed franchise agreement and negotiate terms.
Only an experienced franchise attorney will know the risks and what is possible in a negotiation. There are many other provisions to consider than what is addressed here, so consult an attorney to get the optimal benefits.
**This blog is for general informational purposes only. Cipparone & Cipparone, P.A. does not distribute legal advice through this blog. As such, this blog does not constitute legal or other professional advice and no attorney-client relationship is created between the reader and Cipparone & Cipparone, P.A.