Negotiating a Franchise Agreement
Contracts of Adhesion
Franchising is intended to be a method of business expansion focused on consistent, sustainable replication. Because of this, franchise owners prefer consistency in their contracts with franchisees. Significant changes from one agreement to the next are uncommon.
Your ability to negotiate changes to your franchise agreement will depend on the maturity of the franchisor, the size of the system, the markets you are entering, the brand's visibility in your area, how many franchises you are acquiring, and whether your requests are reasonable and supported.
Franchise agreements are often referred to as “adhesion contracts,” which basically means they are designed so that franchisors can enter into contracts with multiple individuals without tailoring changes in each instance. Adhesion contracts are not limited to franchising.
Contracts of adhesion are generally enforceable when the terms of the contract are not unconscionable, deceptive, or against public policy. Franchisors will also argue that the disclosure process affords the franchisee with the necessary time to review and understand the terms of the agreement, as specified by the Franchise Rule. Where there is ambiguity in the contract, the courts will generally interpret the clause in favor of the person that did not draft the contract.
Why Deals Fall Apart
Often, attorneys unfamiliar with franchising will spend hours reviewing franchise agreements detailing changes they feel are essential for their clients. Then, the franchisee discovers that the franchisor is reluctant to make any significant changes. Deals often fall apart because of inexperienced legal counsel, but changes to franchise agreements are possible.
Even if your lawyer feels that the contract is “one-sided,” don’t expect many franchisors to make significant changes simply because you feel it is important. Franchising simply does not work that way. The agreement you are presented by the franchisor will generally be the agreement you will need to sign if you want to become a franchisee in their system.
There are advantages to joining a system that will not negotiate with you. It actually can be a good sign. If you're looking for a franchisor that has a focus on consistent replication of their brand promise to consumers, then you want the franchisor to have the ability to enforce its brand standards with all of the other franchisees. Consistency from location to location, after all, is what consumers most often will rely upon when making their choice of where to shop.
If a franchisor is willing to negotiate with you on significant issues, it's likely they will do so with other franchisees—and that could be an indication of potential problems and weaknesses within the franchise system.
What Changes Are Reasonable
Do you resign yourself to accepting the agreement without asking for any changes? Limit demands to things that provide you with real benefit, but don't affect the ability of the franchisor to have consistency. Until you ask, you will never know. Some changes you might look for include:
- Extra help opening your business: Most franchisors provide some assistance to franchisees when they open their new location. They may be willing to provide you with additional support during your grand opening by keeping their field personnel on hand for a longer period of time to provide you with extra guidance and training for you and your staff.
- Money: Some franchisors might be willing to contribute money to your grand opening advertising and marketing.
- Greater territorial protection: If the franchisor is providing you with a protected territory, making the case that your location can support a greater area than provided for in the form agreement is possible. But you will generally have to make the business case for this added territorial protection. This may be difficult or impossible to obtain from larger, more established systems, but is worth asking for in smaller, start-up systems.
- Modifications to the transfer fee: This could come in handy if you decide later on to sell the business to another franchisee.
- Modified payment terms for your initial fee: While most franchisors will resist this, it is worth asking for given the difficulty some franchise systems are experiencing with their franchisees finding bank financing.
- Other fee modifications: A modification to your franchise fee or continuing royalties, if you are converting your business to the franchisor’s brand.
- Extended time to cure certain defaults: Franchisors need you to operate your business to their brand standards, and they may look upon this request as an indication you are not intending to consistently stay in compliance.
- A grant of a right of first refusal or first notice: Ask for this option before the franchise in the territory next to yours is sold to someone new.
- Personal guarantee waiver: Seek limits on the guarantee most franchisors requires when you sign the franchise agreement.
For Multi-Unit Franchisees
These change requests apply to the owners of more than one franchise:
- Reduced royalty: This is a trade-off for the franchisor not providing you some services you may be able to provide to yourself, such as staff training and site development.
- Consistency: An agreement that your franchise agreement or certain terms of your franchise agreement will not change for each franchise location you develop over the term of your development agreement.
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, as well as what you are bringing to the table. Don’t expect large, established systems to make many changes. But, even with larger systems, if you are a multi-unit operator, some franchisors will listen to your concerns and make concessions.
As with any franchise agreement, it is important to have a qualified franchise lawyer working with you. Keep your requests for changes to a reasonable level, as most franchisors, will not consider you a serious candidate if you come to the table with reams of change requests. But if you find that it's easy to get changes to your agreement from the franchisor, don't accept that as a good sign; you want a franchisor that can enforce its brand standards so that you are protected from the bad acts of other franchisees. Besides, they might just be an easy negotiating partner because they need your franchise fee to make next week’s payroll.
The Bottom Line
Never enter into any agreement that does not meet your purpose. If there are terms in the franchise agreement you materially object to, and you can't negotiate with the franchisor, choose a different franchise opportunity that meets your needs. Another option is to go it alone and start your own independent business outside of any franchise system. Down the road, if your business is successful, you may choose to become a franchisor—and then you can make the decisions on what is in your franchise agreement and what terms you are willing to negotiate.