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.