Negotiating Your Franchise Agreement

URL: http://www.entrepreneur.com/article/57100

Q: I've decided on the franchise I want to buy, and I'm wondering how to negotiate the franchise agreement. It seems like a fairly one-sided document, and I'd like to take it to an attorney. What are some typical areas to address in negotiating these agreements, and what's reasonable to expect in terms of results?

A: This is an important topic that's often misunderstood, especially by first-time franchise buyers. Let's cut to the chase--most really good franchise companies won't negotiate their franchise agreement at all.

There are a number of reasons franchise companies refuse to negotiate, including:

• The issue of fairness. Why should a better negotiator get a better "deal" on the terms of the franchise, rather than every franchisee getting the same deal?
• The issue of legal requirements. A franchise company must comply with laws requiring them to disclose special deals or terms they negotiate under certain circumstances or with selected parties. This requirement protects other prospective franchisees through full disclosure, but compliance is cumbersome for a franchise that's executing many different terms.
• The issue of administration. It's a nightmare for a franchise system if every franchisee is on a different contract form with various terms and provisions. There's a significant cost to doing business this way, because every question that comes up requires a contract review before an opinion can be given.

As far as your comment about the one-sided nature of this contract, you're absolutely correct. Franchise agreements are unilateral contracts prepared by the franchisor to protect their interests and the interests of the franchise system as a whole. That's the reasoning behind the provisions you see in the agreement.

This is not only true concerning the economic terms, but also many of the other provisions designed to protect the quality standards and uniformity of the franchise system. If you want to buy a McDonald's location, but you'd rather have blue arches instead of yellow, that's not going to happen.

You mentioned going to an attorney. This is always a good idea whenever you want to negotiate any contract. In the case of a franchise agreement, make sure the attorney deals with franchise agreements on a regular basis. Also find out whether the agreement is negotiable or not in advance.

The way you determine this is by asking the franchisor, "If my attorney finds even one word in the entire agreement that needs to be changed, is this something we can talk about?" Quite simply, if the answer is no, then the agreement is nonnegotiable. If the answer is yes, that means anything in the agreement is fair game, and they'll negotiate it all.

Some contracts we deal with in life are commonly negotiable and some aren't. As an example, I've never heard of a lease that wasn't negotiable, and I've never heard of an insurance policy that was. Both are contracts used every day in business. There's confusion when it comes to franchise agreements, however, because there is no such general rule of negotiation relating to this industry.

As I already pointed out, most really good franchise companies won't negotiate their agreements. That's because these companies typically have a solid track record, existing successful and happy franchisees, a strong brand and operating system and, most important, a steady stream of people who want to become franchisees in the system. They don't have to negotiate their agreements in order to grow their system.

Many other franchise companies are willing to negotiate their franchise agreements; in fact, many of them will negotiate virtually any provision other than the initial, upfront fees you pay them. If you give this fact a little thought, you'll see the potential risk this situation represents for you.

Be cautious if the franchise agreement is negotiable. Your "deal" will be based on your skill, and you obviously want the best deal possible. If this is the case, make sure you consult a franchise attorney. Also, call as many existing franchisees as possible and find out what deal they got. In many cases, they might be willing to send you copies of the addendum with the changes they negotiated, so you can get a quick feel for what's available and make sure you're not missing anything.

A common exception to the non-negotiation position of many good franchisors is in the territory definition addendum. This won't do you any good if the agreement doesn't have any exclusive territory or if the territory is always defined exactly the same (such as a fixed distance radius). It will be important if the territory is an addendum to the contract that relates to ZIP code or other boundaries, or to a standard number of households or businesses.

If you're considering buying a really successful franchise system that won't negotiate their franchise agreement, your decision becomes relatively simple. Do you want the franchise or not? If you do, sign the agreement as is just like everybody else. If not, then don't. It's the exact situation you face when you're buying your insurance policy-though this definitely warrants more consideration. After all, signing your franchise agreement is a potentially life-changing decision.