Typically Franchise Agreements are drafted heavily in favor of franchisors. This enables a franchisor to ensure that its franchisees operate in a consistent manner based on a set of system standards. It is for this same reason that many franchisors are unwilling to make significant changes to their franchise agreements. Although many franchisors are unwilling to negotiate much of the Franchise Agreement there are some terms, that depending on how well known and established the franchise system is, many franchisors will negotiate.

Initial Franchise Fees for Multiple Units – Many relatively new or less established franchise systems may be open to negotiating a lower price for second, third or other additional franchise territories/units. These franchisors are interested in growing quickly and establishing their brand and are more willing to work with prospective franchisees.

Capital Expenditures – Many franchise agreements require the franchisee to implement changes to system standards even if such changes require a significant capital expenditure. Often times franchisees can negotiate a limitation to these capital expenditures. One such example would be setting an upper limit on expenditures over the first few years of operations, in order to keep capital expenditures down during the leaner start up years.

Renewal of the Franchise Agreement – Most franchise agreements have a term of between 10 and 15 years. At the end of this time period, successful franchisees will likely desire to renew the franchise agreement. The typical franchise agreement gives the franchisor the ability to force the franchisee to sign the most current form of franchise agreement even if it contains a higher royalty, marketing fund, or changes to other important terms. It is extremely important for a franchisee to negotiate a provision that requires the franchisor to renew the agreement with the same royalty and territory, otherwise the franchisee may end up paying considerably more to the franchisor for the right to operate the franchise.

Transfers – Many times a franchise agreement will require a transfer fee and written approval before a franchise may be transferred to any person. Often times a franchisee can negotiate an exception to transfer fees and written franchisor approval for transfers to a family member or to another entity that is owned by the same owners as the transferor franchisee.

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So you have worked out a tentative deal to sell or purchase a business. Now what? Although it isn’t an absolute must, a Letter of Intent may be the best next step. A Letter of Intent is essentially a written document that sets out the basic terms of the deal including the price, payment terms, structure of the deal, the proposed closing, and more.

What goes into a Letter of Intent?

Letters of Intent usually contain the most important business terms of the deal such as the price that will be paid for the business. Payment terms such as all cash or part cash part promissory note is also a common provision in Letters of Intent. Whether the deal will be an asset purchase or a stock transaction may be covered. If the deal is an asset purchase are there any assets that will be excluded or any liabilities that the Buyer will be assuming, such as an office lease? The anticipated closing date may also be included.

From a buyers perspective one of the most important provisions in a typical Letter of Intent is the “no shop” clause which essentially prohibits the seller from fielding other offers during a certain period of time. This clause protects the buyer from expending time and resources in preparation for the transaction and then having the business sold out from under them to a third party that presents a better offer.

From a sellers perspective they may want to include a provision making the Letter of Intent “binding” providing the buyer with a limited ability to walk away from the deal. This provision protects a seller from expending their valuable time and resources just to find out that the buyer was just kicking the tires.

What are the benefits of a Letter of Intent?

There are many benefits that a Letter of Intent can provide. These include:

1. Clarification of the important deal terms;
2. From a buyer’s perspective the “no shop” clause;
3. From a seller’s perspective a “binding” provision;
4. Provides a time table for the transaction; and
5. Set out the expectations for the buyer’s due diligence process.

The attorneys at General Counsel Consulting have many years of experience in drafting Letters of Intent and other purchase documents. If you have worked out a deal to sell or purchase a business call General Counsel Consulting for assistance in drafting or reviewing your Letter of Intent.

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