Franchise Agreements – Are They Negotiable?

FRANCHISE AGREEMENTS: ARE THEY NEGOTIABLE?

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.