Franchise Agreements Are Negotiable
Are Franchise Agreements Negotiable?
Yes, franchise agreements are negotiable.
If you are evaluating the purchase of a franchise, you may have heard or been told that franchise agreements are not negotiable or that the franchisor will not make any changes. While franchisors are well within their rights to refuse any changes to their franchise agreement, they are allowed to make certain changes for your benefit as a franchisee, and in the vast majority of franchise sales transactions, franchisees and their franchise lawyers do obtain negotiated changes.
Below, we discuss the franchise agreement negotiation process, under what circumstances a franchisor can negotiate and modify the franchise agreement, and the types of changes that can positively enhance the rights of franchisees.
How Does the Question of the Negotiability of Franchise Agreements Typically Arise?
If you are about to buy a franchise and you are questioning whether or not your franchise agreement can be negotiated, you may relate to the following scenario:
- You are evaluating a franchise opportunity;
- The franchisor discloses its FDD to you;
- You have discussions with the franchisor and the franchisor's sales team and possibly attend a discovery day;
- You decide that you are ready to move forward, and the franchisor's sales representative tells you that although you could have the FDD and franchise agreement reviewed by a lawyer, the franchisor does not negotiate its franchise agreement and will not make any changes; and
- Some salespeople may even tell you that, legally, the franchisor is not allowed to negotiate or make changes to the franchise agreement.
Since you already know that the franchisor CAN make changes to its franchise agreement, the next step is to carefully review the franchise agreement (preferably with an experienced lawyer), evaluate the assumptions that underlie your franchise investment decision, compare those expectations to the rights that are and are not granted to you in the franchise agreement, and evaluate the types of changes that you will need to make to the franchise agreement in order to buy your franchise.
Are Certain Types of Franchisors More Willing to Negotiate Franchise Agreements?
While we have seen franchisors large, small, start-up, and established make reasonable changes to their franchise agreements, generally, start-up and smaller franchise systems are more willing to negotiate and make changes. Smaller franchise systems generally grant larger concessions.
There Are Limits to Changes That a Good Franchisor Should and Should Not Negotiate
When evaluating the types of changes that you may request, it’s important to have a plan of action and to compare (a) your expectations as to what you have been promised and the legal rights that you will be acquiring as a franchisee, with (b) what the franchise agreement actually says. That is, don’t request changes for the sake of negotiating - be strategic.
Also, it’s important to understand that there are certain changes that “good” franchisors should be unwilling to make – to legal rights where it would be wrong and unfair for a franchisor to treat its franchisees differently.
EXAMPLES OF FRANCHISE AGREEMENT PROVISIONS THAT GOOD FRANCHISORS SHOULD NOT BE WILLING TO NEGOTIATE
- Franchise Fee - Changes to the franchise fee;
- Royalties - Reduction of the royalty rates;
- Brand Development Funds - Brand development fund requirements; and
- Products and Services - Requirements that restrict the products and services that you, the franchisee, can offer.
A good franchisor should be unwilling to negotiate on these items because by giving you a special deal (i.e., you are charged a lower franchise fee or you pay a lower royalty rate), the franchisor is treating its franchisees disparately and, more than anything, this should be viewed as a warning sign as to the integrity of the franchisor and the seriousness of its franchise system.
EXAMPLES OF FRANCHISE AGREEMENT PROVISIONS THAT GOOD FRANCHISORS MAY BE WILLING TO NEGOTIATE
Franchise agreement provisions that good franchisors may negotiate relate to your individual rights as a franchisee. Examples of some of the franchise agreement provisions that you - as a prospective franchisee - should be considering and evaluating with your lawyer include:
- Territory - The scope and size of your designated territory and whether or not the franchisor has permitted carve-outs for special venues such as malls, stadiums, and other captive accounts;
- Personal Liability - The scope and nature of the personal guarantees that you will be making as a franchisee or as the owner of your company that will become a franchisee. While it is expected that you will be required to personally guarantee your franchise, you should evaluate the franchise agreement and whether or not you can limit your financial exposure if you close the franchised business;
- Additional Development Rights - If, as part of the franchise sales process, you have discussed with the franchisor your need for supplemental territory protection, you may consider negotiating a “right of first refusal” where you would be granted the first right to establish another location in an adjoining territory;
- Family Transfers - Franchise agreement changes focused on accommodating estate planning and transfers of ownership to immediate family members are fair, and many times, expected by franchisors;
- Remedies for Curing a Default - Depending on how the franchise agreement is structured, your attorney may see a need to give you extra rights that would permit you to cure a default of the franchise agreement;
- Renewal Rights - Upon renewal, you may want to ensure that your renewal franchise agreement contains similar terms and you don’t lose important rights related to your territory; and
- Special Circumstances - There are many special circumstances that may relate to your franchise opportunity and your negotiations and discussions. You should carefully discuss these circumstances with your lawyer.
The changes that you may want to negotiate and make to your franchise agreement will, in large measure, depend on how the franchisor’s franchise agreement is structured. So, a careful and practical review and evaluation of the franchisor’s FDD and franchise agreement will be critical.
How Are Changes Made to the Franchise Agreement?
Typically, negotiated changes to a franchise agreement are made through what is referred to as a franchise agreement “rider” or “addendum.” Because the franchise agreement is a form document included in the franchisor’s FDD, the majority of franchisors and their lawyers prefer to not make changes to the form. The rider or addendum is separate from the franchise agreement but modifies the terms of the franchise agreement.
Focus on what’s important to you, the assumptions that underlie your franchise investment decision, and the rights that are granted to you in the franchise agreement. Consider teaming up with an attorney experienced in franchising to leverage his or her experiences working with successful franchisees.