Can I negotiate my franchise agreement?
It is common knowledge that most franchise agreements are onerous and one-sided. This is because franchise agreements are written by franchisors’ lawyers to protect the interests of the franchisor and the interests of the franchise system as a whole.
Therefore, the more established systems are generally reluctant to negotiate and will not usually make any amendments to the standard template franchise agreement used as a base for a particular franchise.
There is also the issue of uniformity. Each franchisee in the same system should be on more or less the same terms for the ‘fairness’ factor. Furthermore, if the franchisor makes deals with particular franchisees, some of these deals may be required to be disclosed in the franchisor’s disclosure document in the future, which may cause tensions among the current franchisee network.
However, if you stick to your guns and negotiate, you must be willing to walk away from an opportunity if its terms are not satisfactory. You must also understand the reasonableness of the changes you are asking the franchisor to make as the franchisor’s main priority is protecting its system as well as what changes the franchisor would be more likely to agree to.
The conditions contained in the franchise agreement that we have seen the franchisors are more willing to negotiate include the following:
1. REDUCTION OF THE INITIAL FRANCHISE FEE
It is highly unlikely that a franchisor will reduce the ongoing royalty fee. However, in a number of circumstances an upfront franchise fee may be negotiated down. This may be because your franchise is a greenfield in the area where the franchisor has not yet operated in.
In addition, if you already operate a similar business and are looking to join a franchise and bring your current customers across, the franchisor may be willing to reduce or even waive the upfront fee as a gesture of goodwill.
The upfront fee to buy a franchise is similar to a joining fee in the gym. The franchisor does not necessarily rely on it to make a profit and it can often be reduced.
2. THE SIZE OF THE TERRITORY
The franchisor is much more likely to negotiate on the size of the territory offered to you than any terms and obligations contained in the franchise agreement.
3. FIRST OPTION TO BUY THE ADJOINING TERRITORY
Franchisors are often willing to offer its potential franchisees the right of first refusal to buy an adjoining territory should it ever be franchised for a set amount otherwise on the same terms and conditions as your current franchise agreement.
4. TERM OF THE FRANCHISE AGREEMENT TO COINCIDE WITH THE TERM OF THE LEASE
If your franchise is based at a particular premises, you should insist that the term of your franchise agreement is in line with the term of the lease or you may end up being liable to the landlord for rent of premises after your franchise agreement expires.
5. MORE FAVOURABLE TERMS UPON THE SALE OF YOUR FRANCHISED BUSINESS
You should ensure that the process of selling your business in the future is as easy and seamless as possible.
There will always be conditions that you and the potential franchisee must meet before the franchisor will agree to transfer the franchise from you to them. However, these conditions must be reasonable. Consider at the outset the fees that you would have to pay the franchisor upon any potential sale, being the transfer fees and the franchisor’s legal fees.
Negotiation techniques will also depend on particular circumstances. For example, if you are converting your existing business with its customer base to a franchised brand, then you may have more leverage than other franchisees in relation to areas such as non-competition and upfront fees payable.
There are more than 1300 franchise systems operating in Australia, so you are likely to have a choice of systems in any given sector. So you should ensure that the franchise agreement which you end up signing, is the agreement which you can follow and comply with whilst having a great working relationship with the franchisor and, hopefully, making a profit.
We recommend that you contact a franchise lawyer to review your franchise agreement and negotiate more favourable terms with the franchisor on your behalf.
Ilya Furman is the founder of Franchise Legal_; Jane Garber-Rosenzweig is Special Counsel