What to Negotiate in Your Franchise Agreement

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Recently, I was asked: "If you could negotiate any terms up front, what would be the key ones?" Here is my general approach:

First, review the FDD and determine if they are using franchise brokers to sell. If so, you can knock off about 11-20k from the franchise price by asking for the broker's rebate.

Now, you have a budget and money. Use it to hire a professional franchise attorney who will negotiate the terms in the agreement that make sense for your situation. (And yes, franchisors will offer addendums or side agreements - the California has a database is full of such side deals. If you accept at face value that franchisors "won't do x", then franchising is going to be a one sided deal for you.)

Any terms that go directly to the franchisor's business model, such as royalty rate and advertising spend are not on the table, except if you are going to be an area developer.

1. Get rid of the personal liability condition - it is a millstone which will force you to continue funding a mistake. The franchisor is not guaranteeing anything, why should you? Never sign an agreement with an unlimited personal guarantee.

2. Enumerate exactly the oral/written representations you are relying upon when signing the contract and carve out an exemption from the too general integration clause.

3. You probably want a discussion about the choice of laws/forum selection clause.

4. On item 7/8 in the FDD, you want written representations which clarify some of your concerns. Specific to your individual situation.

5. Get rid of the cross default clause, and the obey all laws clause. These clauses transfer too much bargaining power, via threats, to the franchisor. They are also completely unnecessary.

6. Get rid of the right of first refusal, which will drive down the value of selling.

7. Carefully review the liquidated damages clause, if there is one.

8. Avoid any franchises which radically restrict your use of social media for local marketing; these franchisors are already signalling that they are going to waste your national ad fund.

Those are the general areas, and there may be more important specific clauses of concern to you depending on your own business model. It is impossible to give good guidance on the territory issue, for example, with seeing the exact clause and knowing of your own local marketing ideas.

Do not waste your time trying to talk with other franchisees. if there is an independent franchisee trade association, talk with them directly about how the franchise agreement has changed, for better or worse over time.

You have the maximum bargaining power at the beginning of the relationship - just before you say "yes".

If you don't have professional training in negotiation, hire an attorney who does have specialized skill in this area.

Expect to pay between 7-10k to get an agreement which protects your rights. The value will be well worth it.

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6 Comments

Michael, I represent franchisors, franchisee associations, master franchisees and franchisees in negotiations. You have some good ideas in your list, especially items 1,2, 7 and 8. (Your items 3-6 are not likely to be changed by a franchisor.) I would add to your other items the following:

1. Territorial Exclusivity Carve-outs. Some franchisors give no territory or reserve the right to put competing businesses right next to you. Try to limit such direct competition; and look for systems that will share the revenue and customers from online sales.

2. Ownership of Customer Data. Franchisors and franchisees should share ownership, control, and use of customer data. Some agreements give franchisees all of the duties, and none of the benefits, of customer data.

3. Reasonable Covenants not to Compete. Franchisees will often want to invest in related but not directly competing businesses, e.g. a Subway franchisee wants to buy a McDonald's franchise. Ask for reasonable restrictions, that are not overly broad. Likewise at the end of the term, non-renewing franchisees may be stuck on the lease, and should be able to continue non-competing businesses at the location.

4. Reasonable Transfer Provisions and Options to Purchase. A franchisee ought to be able to sell the business at a fair value, and franchisor's consent should not be unreasonably withheld. A surprising number of franchisors try to force a sale to it at a nominal price.

Gary Duvall, C.F.E.

"Do not waste your time trying to talk with other franchisees." Why?

Jeff Sherman, Color Me Mine

It sounds like you had a bad experience in talking to franchisees before you bought your franchise. However, this is a good reminder that getting validation that the franchise is a fit for you, by talking to existing and former franchisees, is very important.

Hello Gary

I did not have a bad experience, however the experience provided good insight into the chain. One franchisee complained most complimented. I got a better idea what to expect from all comments, good, bad and neutral.

I am also a master licensee, so I have allowed/suggested a potential sub-licensee talk to other franchisees. Maybe I am wasting my time or maybe I am wasting good leads by doing so. I figure they would do it anyway, because I did and found it useful.

I was curious as to why Michael thought it was a waste of time.

Thanks,

Jeff Sherman, Color Me Mine

Gary, these are excellent additions.

I know that Keith Kanouse has a long list of provisions he routinely seeks, and with justifications that appeal to the franchisor.

One of the reasons I talk about getting the broker's rebate is so attorneys like yourself can get paid to negotiate with the franchisor.

Jeff;

When you talk with a franchise owner, nothing that they say can be legally relied upon.

It might make you feel good and it might even give you some useful information.

But, most of the time you are simply confirming your previous views. It is not serious due diligence.

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This page contains a single entry by Michael Webster published on May 6, 2015 10:21 PM.

"Be Your Own Boss" - The Franchise Myth was the previous entry in this blog.

Is NLRB "Pushing the Envelope" to Protect Employees' Rights to Communicate Online is the next entry in this blog.

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