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What Should You Negotiate in Your Franchise Agreement (Part 1)?

Negotiating Your Franchise Agreement

So we have previously discussed that franchise agreements are negotiable – they absolutely are. Knowing this though raises the next question which is what terms and provisions should you focus on negotiating before signing a franchise agreement? Al ot will depend on your personal circumstances and the specifics about the franchise that you are about to purchase‚ however there are certain “universal” negotiating points that you should be considering.

Some “Universal” Franchise Agreement Negotiating Points to Consider

  • Your Protected Territory – Your goal before signing a franchise agreement will be for you to fully understand whether or not you will be granted a protected territory. If you are granted such a territory then you must ensure that the scope of the protected territory meets your expectations and understandings. Evaluate the exceptions to your protected territory‚ the size of your protected territory‚ whether or not your protected territory is contingent on certain sales quotas or requirements and whether or not (especially when dealing with smaller start-up franchises) you can negotiate an increase in the size of your territory.
  • Your Individual Liability – Whether you establish a corporate entity or not‚ 99.9% of the time you will be required to “personally” guarantee the terms of your franchise agreement. While it is absolutely reasonable for franchisors to expect you to personally guarantee your franchise agreement‚ you must nevertheless put some limits on your personal guarantee.

For example‚ what happens if you sign a 10 year franchise agreement and if after two years (after much effort and capital) you decide to close your doors? Technically you are in breach of your franchise agreement and technically the franchisor (depending on the terms of your franchise agreement) may claim lost future royalties (i.e.‚ royalties that they would have received if you did not shut down). In such case one franchise agreement modification that you will want to consider will be to limit your personal liability to “past due” obligations but not future obligations should you elect to close down.

There are other “universal” negotiating points to consider and we will discuss them in future posts. If you would like to learn more about buying a franchise contact us.

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