It’s OK to Negotiate Parts of the Franchise Agreement, and You Should
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Franchising means being part of someone else’s successful business idea. It comes with operating systems and branding that help ensure consistency to customers. The established business model of a particular franchise usually protects both parties, and many aspects of the franchisor-franchisee relationship are not flexible. Fees, royalties, and other costs are usually normalized for all franchisees.
However, it is important to protect yourself as a franchisee, and it is ok (and often wise) to negotiate parts of your franchise agreement to suit your specific location.
To protect themselves, franchisors include restrictive covenants that prevent a franchisee or ex-franchisee from opening a like business. Naturally, the franchisor prefers to limit competition, and the agreement not to compete with the franchise’s industry often specifies many years of non-competition. However, if you are an excellent mechanic who sells your car service franchise, you might want to open your own private car service. You can probably reduce the number of years in the non-compete clauses or eliminate the restriction in its entirety. In many states, non-compete restrictions are not legal because they prevent a person from earning a livelihood. Whatever your situation, reducing restrictions might be very important down the road.
Sometimes, franchisors will not agree to protect your territory from other possible buyers who would open up in your neighborhood. Just as the franchisor prefers less competition, you will want that, too. Clarify your area, understand the outside competition, and do your best to ensure that the franchisor will not encroach upon your territory with more franchisees nor with company-owned locations. If nothing else, you might be able to secure the right of first refusal to buy a second location near to you when good sales volume justifies an expansion in your area.
Terms of Future Sale and Transfer
When you need or want to sell your franchise, you will want the best possible price. Franchise agreements often stipulate that the franchisor has the first option to buy your franchise. Unfortunately, their price is not always at the fair market value you could get from an outside buyer or an existing partner. Franchisors often depreciate the value of your asset, and you must review their terms as you negotiate your agreement.
Perpetual Renewal Rights
The franchise is your business and often your family’s source of income. Renewals, therefore, should be long-term or perpetual to protect your future. Without strong renewal protection, the franchisor might not renew your agreement. If they want to sell the business or leave the industry as agreements expire, a franchisee might be left without a business or income after many years of building it. Combined with a non-compete clause, it would be a personal disaster. Franchisors need a way to exit, also, but negotiate hard to protect your long-term franchise plan.
Franchisors will try to protect themselves from insurance claims, tax fines, or other things that occur at your business. Likewise, franchisees should negotiate shared responsibility for anything that also involves the franchise business model. Try to limit your exposure only to the things you can control.
Damage limits should be in balance with the franchisee’s investments. Often, franchisors will limit these without considering the causes of damages. For example, if a franchisor fails to maintain supply chains for the brand that causes a business failure, the franchisee might have to share the loss unless outlined in the franchise agreement.
Cross-fault provisions apply to owners of multiple units. If a franchise fails, the franchisor can default on the agreement. However, if you have more than one unit, the franchisor could apply fault to every unit owned even if only one location fails. Negotiate unit by unit on this provision. A good-faith franchisor will normally flex a default provision fairly based on each unit’s performance. Of course, an owner who is operating in fraudulent ways would be an exception. A franchisor will not negotiate away their ability to protect a brand’s reputation soiled by franchisee misconduct.
Every situation is different, of course, but as you consider your franchise options, insist on fairly reviewing the “usual” franchise agreement terms. In many cases, the template used is not appropriate for your needs or should be reconsidered. It is ok to negotiate many terms, strengthening your franchisor relationship with a solid franchise agreement.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.