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.
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:
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.
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.
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
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:
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.
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.
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