Negotiating your franchise agreement

 By Tony Wilson
Many prospective franchisees tend to think the franchise agreements presented to them by franchisors are non-negotiable contracts, written in stone. As they understand it, these are standard-form contracts that are never negotiated. In some cases, they have even heard franchise agreements cannot be changed for any single franchisee because that would be illegal.

On the contrary, franchise agreements are indeed often negotiated on the part of both franchisees and franchisors, though perhaps not in the ways you would think. In some cases, franchisors refer to the process not as negotiation, but as ‘clarification.’

Some, not all
As the president of a large franchise system once said, “What you don’t ask for, you’ll never get.” As he saw it, franchisees can and should try to negotiate some aspects of the franchise agreement, as there may be room to adjust certain provisions.

That said, he also pointed out that negotiating everything would be counterproductive. (He may have said ‘stupid.’)

The worst strategy for a prospective franchisee would be to have his/her lawyer prepare a 10-page-plus letter outlining dozens of points that ought to be changed in the franchise agreement the franchisor paid its own lawyers thousands of dollars to draft in the first place. That would be a great way to elicit a very short “thanks but no thanks” e-mail from the franchisor or its lawyers—assuming the letter was answered at all.

Out of the dozens of points that you, as a prospective franchisee, might want to see changed in a perfect world, however, there might be four or five main concerns the franchisor is inclined to negotiate. The situation depends on a lot of factors, including the franchisor’s corporate culture, how new the company is to franchising and what you bring to the table.

Negotiate or not?
Franchisors will rarely, if ever, agree to a concession on royalties. It would create problems throughout the entire franchise system if one franchisee were to get a better deal than another in terms of continuing royalty payments.

Initial franchise fees, which pay for the right to become a franchisee in the first place, are also rarely subject to negotiations, at least with established systems. The only exception might be a ‘startup’ franchisor that does not have many franchisees yet and so may be prepared to make a deal on the initial fee.

So, if the franchisor is in a startup phase, you might have some leverage in this area. Similarly, if the territory you’re in is new, without any established franchisees nearby, or you are working with a master franchisee or area developer, there may be room to negotiate the franchise fee.

For established systems with more than a few franchises, such efforts at negotiation would likely be a waste of time, but there could be exceptions. If you are acquiring more than one location, for example, the franchisor might entertain a lower initial franchise fee for the additional locations on the basis that you have already been trained once as a franchisee, given that training costs are often worked into the franchise fee.

Some well-known franchisors even provide for such reduced fees in their franchise agreements. So, if you are interested in running more than one location, you may want to consider exercising leverage in this regard.

Beside royalties, all franchisees in a system will pay advertising fund contributions to their franchisor, which allow it in turn to advertise the entire system in high-cost media, such as TV ads. Unlike royalties, however, these fees may be worth assessing in the negotiation stage.

If the system only has three franchises so far, for example, it lacks the critical mass necessary to create a fund large enough to advertise in high-cost media. So, it would be legitimate for you to negotiate a deferral of the instigation of advertising fees until there are sufficient numbers of franchises to justify the collection of such a fund. In the meantime, the money that would be directed to the system’s advertising fund could instead be directed to local advertising with the franchisee’s own territory.

There are other fees payable by the franchisee to the franchisor, as well. If you are a prospective franchisee in Alberta, Manitoba, Ontario, New Brunswick or Prince Edward Island, then these fees will be specified in the franchise disclosure document the franchisor is legally obligated to provide to you before you can sign any franchise agreement.

The disclosure of such fees might raise an eyebrow if you feel you will be nickel-and-dimed. You should avoid having to pay for the preparation of the franchise agreement, for example.

Others will require careful assessment. What, for example, does the franchisor plan to do to warrant the payment of a technology fee? It may be totally justified through franchisor-provided services, but if not, it should be negotiated away.