Click to Print

Is it illegal for a franchisor to offer first right of refusal?

Or can a franchisor offer a surrounding territory to an existing franchisee at a discount?
Jeff Elgin answered October 1, 2009
URL: http://www.entrepreneur.com/answer/221991
It is not illegal for a franchisor to do either of these actions, though they may be required to disclose such actions to you as a potential franchisee. Though it might not be illegal, that doesn't mean it's a good idea.

Most franchise companies learn, either from the experience of others or from their own mistakes, that offering rights of first refusal on additional territories is usually a nightmare scenario to administer.

You will rarely find a successful franchise company of any substance that is willing to grant such a territorial right to a franchisee. In fact, I would take a willingness to do so as a reason to have concern about the experience and savvy of the franchisor and it would make me wonder how many other stupid things they might be doing that I haven't spotted yet.

In terms of discounting franchise fees to existing franchisees who want additional territory, this is a common and thoroughly justified practice. In my mind, the initial franchise fee is primarily a revenue source the franchise company uses to offset part or all of the cost of recruiting and training new franchisees.

If an existing franchisee buys an additional territory, the company isn't going to have any significant additional cost in relation to recruiting or training the franchisee so a discount is easy to grant.

Franchise companies are required to disclose in their FDD documents when they have a program or potential for granting discounts from the standard franchise fees.

Jeff Elgin has almost 20 years of experience franchising, both as a franchisee and a senior franchise company executive. He's currently the CEO of FranChoice Inc., a company that provides free consulting to consumers looking for a franchise that best meets their needs.