Myth: It is Illegal for a Franchisor to Negotiate and Modify the Terms of its Franchise Agreement?
In certain franchise sales settings, franchisees are sometimes led to believe that modifications cannot be legally made to their franchise agreement. That is, to induce a franchisee to sign the franchise agreement – without the benefit of any negotiations or review by a franchise attorney – the franchisee is led to believe that the franchise agreement is a standard agreement (signed by everyone) and that legally the franchisor is not allowed to make any changes. The implication: you might as well just sign the agreement and not waste time or money since we can’t change the franchise agreement even if we wanted to.
Sadly this misstatement/myth leads to a false sense of security and sometimes some big mistakes by prospective franchisees. To be clear:
- Franchise agreements are negotiable
- It is not illegal for a franchisor to modify its franchise agreement
- It is extremely common for franchisees to negotiate certain aspects of the franchise agreement
Understanding these facts keep in mind that the extent to which a franchisor may be willing to negotiate the terms of its agreement varies depending on the negotiating power of the parties – one major factor includes the financial resources of the franchisee. Also, certain core provisions of a franchise agreement – such as the royalty rate, methods of operation and use of proprietary products – usually are not and should not be subject to change.
Some of the critically important franchise agreement terms that you should be evaluating and potentially negotiating, include:
- Scope of your protected territory;
- Grace periods regarding the commencement of royalty obligations;
- Liquidated damages and liability for early termination;
- Renewal rights;
- Transfer rights;
- Cure periods for alleged defaults; and
- Potential rights of first refusal.
Depending on your circumstances and concerns there are many other issues that, as a prospective franchisee, you should be considering. However, it is critical that, as a prospective franchisee, you recognize that you have the right to negotiate the terms of your franchise agreement. This right must be taken seriously.
By admin December 14, 2015
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