Negotiating franchise agreements - Are the terms fixed in stone?

Question: I have found an opportunity I feel is right for me. My lawyer has reviewed the franchisor’s contracts and found several areas they feel are important to have changed before I sign a contract. But each time I present my lawyer’s changes to the franchisor, I hit a wall. They refuse to even discuss most of the changes my lawyer has recommended and have told me their franchise agreement is simply not open to negotiation. My lawyer is advising me not to sign any contract unless I can get some of these changes through. How can I get these franchisors to listen to my needs?

Answer: Depending on the changes your lawyer is asking for, you may not be able to. Often, attorneys unfamiliar with franchising will spend hours reviewing franchise agreements marking up changes they feel are essential to be negotiated. However, in most cases, franchisors are reluctant to make significant changes to their form agreements, and for good business and legal reasons.

Besides some regulatory issues that negotiated changes may raise, the main reason franchisors routinely refuse to discuss modifications has to do with managing their business. The terms of the offering are meant to allow a franchisor to manage a chain of independently-owned businesses using the franchisor’s brand and its system. Having each franchisee operate under a different agreement is not efficient and creates potential difficulties for the franchisor in managing its brand and also its relationship with each of its franchisees.

Most lawyers familiar with franchising understand that for the most part, franchise agreements are what are referred to as “adhesion contracts.” Often, lawyers unfamiliar with the ways of franchising over-reach in the changes they recommend, and this is the reason most franchise experts recommend prospective franchisees have franchise lawyers and not general practitioners evaluate any franchise agreement.

So what is an adhesion contract? Basically, it’s a contract used to limit negotiations, and is an efficient way for companies to enter into agreements with multiple individuals without tailoring changes in each instance. These types of arrangements are commonly used in business today and are not limited to franchising alone. So long as the terms of the franchise agreement are not “unconscionable”—even though your lawyer may tell you that the agreement is “unfair” or “one-sided”—don’t expect many franchisors to make significant changes to their franchise agreements simply because you feel it is important. Franchising simply does not work that way. The agreement you are presented with will be the agreement you sign for the most part, if you want to become a franchisee.

On the flip side, is it a good sign when a franchisor is willing to compromise on anything but the most minor issues? Hardly.

Of all the inherent advantages in owning a franchise, the one overriding strength is franchising’s ability to replicate the consumer experience consistently from one location to another. It is the consistency of a franchisor to deliver on its “brand promise” that consumers most rely upon when making their choice of where to shop. There is little wonder, then, that this culture of sameness extends to how most good franchisors view their contractual relationship with their franchisees. Besides, if a franchisor is willing to negotiate with you on significant issues it is likely they will do so with other franchisees, and that could be an indication of potential problems within that franchise system.

So, is it really a take-it-or-leave-it document? No. Franchisors will routinely make changes to a franchise agreement or offer to provide you with some additional benefits, but will generally do so when these changes have little effect on the system’s consistency. Some of the changes you might be willing to obtain can include:

  • Additional grand-opening support when you open your business. You might ask for the franchisor’s personnel to be on hand when you open to provide extra guidance and additional training for you and your staff. Some franchisors might even be willing to contribute to the costs of your grand opening advertising and marketing.

  • Additional support during the early days of your business from the franchisor’s field personnel. This change is usually easy to negotiate, because good franchisors will view this as benefiting both the franchisor and franchisee’s interests.

  • Given the difficulty in finding great locations today, changes to when you have to have the business open and operating.

  • Modifications in the size of your protected territory or in the case where a franchisor does not routinely grant a protected territory, an area around your location in which the franchisor or other franchisees will not be allowed to compete with you. This may be difficult to obtain from large established systems, but it is worth asking for because smaller, start-up franchise systems may be willing to give this to you.

  • Changes to the standard transfer fee, should you decide later on to sell the business to another franchisee.

  • Installment terms for your franchise fee. This is an area in which most franchisors will resist a change, but it is worth asking for.

  • Changes in the time you have to cure any defaults in the operation of the franchise. This item is important, because if you don’t cure a default in a timely fashion, you could lose your franchise. However, keep in mind that franchisors need you to operate your business to their standards, and the strength of the brand rests in meeting your obligations.

  • A reduced franchise fee or continuing royalties if you are an independent operator converting over to the franchisor’s system and brand.

  • Franchisors may be willing, in some instances, to modify their right of first refusal to purchase your business if you try to sell your franchise before the term of your agreement expires.

  • One of the documents you will likely be asked to sign will be a personal guarantee even if you form a corporation to own and operate the business. Franchisors, in some instances, may be willing to waive it or limit your liability under a personal guarantee.

Whether you will be able to negotiate changes to your franchise agreement will depend to a great extent on the maturity of the franchise system you are trying to enter and what you are bringing to the table. Don’t expect large, established systems to make many changes; however, even large franchisors, if you are negotiating for the rights to open multiple locations, may consider your concerns and make concessions.

The bottom line is that the form agreement you receive will likely be the agreement you will need to sign if you want to enter the system. Your chances to get any change will be dependent on the size of the system, the types of reasonable changes you are asking for, and what you bring to the table. It is essential, though, that before you begin to negotiate with any franchisor you work with a lawyer that is familiar with franchising.

Coming to the table with pages and pages of changes a franchisor most likely will not make limits your ability to successfully negotiate changes they might be willing to provide to you.

And, as always, be careful what you wish for, unless you’re sure what you’re getting.

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“I have known Michael for almost 20 years and he is as knowledgeable about franchising as anyone in the industry. His approach is pragmatic, creative and strategic. When I need guidance or advice in franchising, I go to Michael."

Peter Hoppenfeld, Principal
Peter Hoppenfeld, Attorney At Law
 

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