Negotiate With A Franchisor
Find out which franchise agreement terms may be open to negotiation.
One of the most common myths about franchising is that prospective franchisees are always presented with a franchise agreement on a take-it-or-leave-it basis. But that's far from the truth.
Yet the myth persists partly because of attorneys and business advisors who are more accustomed to negotiating leases and try to apply the same rules to evaluating and negotiating franchise agreements. When they do that, they often discover franchisors don't agree to large-scale suggested changes. Most franchisors will be unwilling to compromise on certain issues simply to make a franchise sale. However, experienced professionals in the franchising industry often know which contract items are negotiable and which items are clearly off-limits to change. That's why franchisees should seek the advice of lawyers and consultants experienced in franchising to help them evaluate and discuss changes to franchise agreements with franchisors.
Of course, it's true that most terms in franchise agreements of well-established franchise systems are inviolate. Those that affect the quality standards of the system, influence how the brand is presented to the public, allow the franchisors to protect other franchisees from poorly performing franchise brethren, and affect system revenue or the advertising fund shared by everyone in the system must remain consistent. After all, those protections are exactly the benefits people seek in a franchise.
And keep in mind that some jurisdictions impose a barrier to negotiation, because negotiated changes may have to be disclosed to future franchisees in the systems' UFOCs. Established franchisors may simply decide that, however important the change is to a prospective franchisee, they would rather miss the opportunity of a sale than negotiate anything. In this case, a franchisee's only option is to accept the agreement as is or seek opportunities with the other 2,000 or more companies offering franchises.
Still, "no change" is not and has never been an ironclad rule, even in the most established franchise system.
So how can you negotiate to get what you want? The first rule of franchise negotiations is to have a professional ally experienced in franchising, one who knows how franchising works, will steer you away from unreasonable demands and is better equipped to effectively negotiate changes for you.
The second rule is to be willing to walk away from the table. You should never sign a franchise agreement without understanding the terms in the agreement or assessing whether you can live with terms you don't agree with.
The third rule is to understand that a franchisor's willingness to negotiate the terms of the franchise isn't always a good thing-it may actually be a danger sign. If the franchisor is willing to negotiate with you on terms that affect the consistency or quality of the brand, it has probably done so with others. Ideally, you want to join a system that protects its brand, and significant changes to the way they offer their brand to the public may affect the integrity of the entire system. That's not a franchise you should join.
A franchisor may also be willing to negotiate with you to make a quick sale. Its payroll might be right around the corner, and the company needs your upfront payment. Joining a system so desperate for cash that it's willing to make changes is a recipe for disaster.
The fourth, and arguably most important, rule of negotiations is to understand exactly what's negotiable. Terms franchisors are often willing to negotiate include:
- Additional training for you and your staff
- Additional support for your grand opening
- Additional field support, both during your initial period of operations and over a longer term
- Changes in the size of your protected territory. In some systems that don't provide a protected territory, it's even possible to negotiate one for your location.
- Changes in the payment terms of your initial franchise fee
- Changes in your ability to transfer the location to another franchisee without incurring the standard transfer fees
- Changes to the standard cure periods if the franchisor finds you in violation of the agreement or standards of operation
- Changes in the franchisor's right to buy your location if you put it up for sale (its right of first refusal) or its right (including the amount of the purchase price) to buy your location at the end of the franchise relationship
- Changes in your obligation to provide personal guarantees under the franchise agreement. Even if a corporation owns the franchise location, most franchisors require you to personally sign a guarantee for the performance of the franchise agreement. Some will waive this for the right franchisee.
- If you're a conversion franchisee (an independent business owner converting your operations to the franchise system), you may be able to negotiate lower fees, terms on liquidating your existing inventory, conversion deadlines for conforming to the franchisor's computer system, modifications to the standard d�cor package and even modifications to the length or the amount of training you're required to go through.
A note of caution to conversion franchisees negotiating a shorter or less comprehensive training program: Take advantage of every minute of franchisor-provided training and avoid relying on the way you used to do things. One of the reasons you probably joined the franchise is that the franchisees who were trained in your new system's procedures outperformed your old business and proved to be more competitive.
The list we've included isn't complete-you should rely on your franchise advisor for recommendations about the reasonableness of the changes you propose. If you want to acquire the rights to develop multiple locations, for example, the franchisor may be willing to negotiate a host of other "standard" issues. Most even expect you to raise these issues.
You should understand, however, that none of the changes in our list would have an impact on the system as a whole. And when it comes to additional services provided by the franchisor, they may even improve your performance and therefore benefit the franchisor as well.
A final note on negotiations: Don't try to recast the franchise agreement in your own image. If you want a franchise agreement whose terms you agree with 100 percent of the time, you'll have to start your own franchise system and draft them yourself. The franchisor has a macro-responsibility-that is, it has to draft agreements protecting the entire system. But if your changes are reasonable, most franchisors, even if they don't usually agree to any changes, will still let you make your case. Give it a try; the results may surprise you.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid recently co-wrote Franchising for Dummies (IDG Books) with Wendy's founder Dave Thomas.