Myth: Franchise Agreements Are Not Negotiable
Fact: Many Terms Are Negotiable If You Know Which Ones
The Franchise Disclosure Document (FDD) and Franchise Agreement outline all of the terms and conditions as well as your relationship with the Franchisor. These are two of the most important documents that you will receive in the entire franchise process.
Franchisors are known for indicating that these documents cannot be negotiated or changed, this is NOT the case and you should be aware of common areas of negotiation.
The FDD and Franchise Agreement together are often over 500 pages filled with legal terminology and provisions. To ensure you are protected and are fully aware of all conditions before you bind yourself to the franchisor, the extensive documents and provisions can be reviewed, discussed with you, and if necessary renegotiated with the right attorney, such as the experienced attorneys at Burke Constanza and Carberry.
Here are the 7 most important franchise business terms to review and negotiate:
Often times you can negotiate the size of your protected territory (an area around your franchise location in which other franchises and the franchisor will not be allowed to operate and compete with you). If the franchisor does not normally offer a protected territory there are cases where you may be able to negotiate this right from the franchisor.
2. Restrictive Covenants (non-competes)
Prior to signing the Franchise Agreement you will likely be required to sign a non-compete and a confidentiality agreement. There are ways to limit the duration and territorial requirement of your restrictive covenant. This will be beneficial after you leave the franchise system if you chose to continue to work in a similar field.
Franchisor’s often require you to sign a personal guaranty, even if you form a corporation to own and operate your franchise. In some cases it may be possible to waive or limit your liability in a personal guaranty.
4. Opening Schedule
Whether you are a single unit purchaser or a multi-unit purchaser do not agree to an overly aggressive opening schedule. When you are opening a business, much like the franchisor finding the right location takes time. You may need to negotiate a longer period of time to provide for a proper opening. Additionally, if you are opening more than one location you need proper time to open and get your location in a profitable state before attempting to open a second or third location.
5. Cross-Default Provisions
Do not allow a franchisor to punish all locations or future locations for a failure of one location. Franchisor’s often have these “cross-default” provisions when you purchase more than one franchise, or if you make a second additional purchase. Keeping each franchise location and franchise agreement separate and distinct is important for any Franchisee.
6. Rights to Renew
a. Term – franchises are contracts for a certain term limit. You typically have a right to renew, but the period of time for the contract may be shorter or you may have to negotiate a new franchise agreement. You may be able to negotiate a longer term with the renewal.
b. No renewal fee – when you renew your franchise, the franchisor may require that you should pay a new fee, known as a renewal fee. This renewal is a portion of the original franchise fee. Often times you can request that this fee be waived.
7. Franchisor Right of First Refusal at a Sale
If you chose to sell your franchise a franchisor typically reserves a right of first refusal to purchase your business back. This may be modified so that you have the ability to sell your franchise without allowing the Franchisor to buy it back.
Learn More About Franchise Law
Franchise law can be complicated and there are common pitfalls that can escalate if ignored or not addressed effectively.