Negotiating a Franchise Agreement

Contracts of Adhesion

Creative business people reviewing proofs in sunny office
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Franchising is intended to be a method of expansion focused on consistent, sustainable replication. Because of this, having each franchise operate under a different agreement is simply not efficient, and tends to create difficulties for the franchisor in managing their brand and their franchisee relationships. Even with franchise agreements that franchisors produce over an extended period of time, there is a commonality and significant changes from one agreement to the next are not all that common.

 

Franchise agreements are often referred to as “adhesion contracts,” which basically means they are designed so that franchisors can enter into contracts with multiple individuals without tailoring changes in each instance. Adhesion contracts are common and not limited to franchising. The term generally refers to form agreements offered by one party to another where the bargaining power of the parties are not equal, and the use of the form agreement is economically efficient and appropriate under the circumstances.

Contracts of Adhesion are generally enforceable so long as the terms of the contract are not unconscionable, deceptive or against public policy. There is also, in franchising, the argument made by franchisors that the disclosure process affords the franchise with the necessary time to review and understand the terms of the agreement, as specified by the Franchise Rule; and also, that at the time the agreement was entered into, the party that truly had the significant degree of bargaining power was actually the franchise, who could unilaterally decide not to enter into the agreement.

Where there is ambiguity in the contract, the courts will generally interpret the clause in favor of the person that did not draft the contract.

Often, attorneys unfamiliar with franchising will spend hours reviewing franchise agreements detailing changes they feel are essential for their clients; then, the franchise discovers that the franchisor is reluctant to make any significant changes.

Deals often fall apart because of inexperienced legal counsel, but changes to franchise agreements are possible.

Even if your lawyer feels that the contract is “one-sided,” don’t expect many franchisors to make significant changes simply because you feel it is important. Franchising simply does not work that way. The agreement you are presented by the franchisor will generally be the agreement you will need to sign if you want to become a franchisee in their system.

There are advantages to joining a system that will not negotiate with you. It actually can be a good sign. If you're looking for a franchisor that has a focus on consistent replication of their brand promise to consumers, then you want the franchisor to have the ability to enforce its brand standards with all of the other franchisees. Consistency from location to location, after all, is what consumers most often will rely upon when making their choice of where to shop. If a franchisor is willing to negotiate with you on significant issues, it's likely they will do so with other franchisees - and that could be an indication of potential problems and weaknesses within the franchise system.

Do you then resign yourself to accepting the agreement without asking for any changes?

I wouldn’t, but I would also limit my demands to things that provided me with real benefit but did not impact the ability of the franchisor to obtain consistency. Until you ask, you will never know. It's not that uncommon for franchisors to make certain changes, and some of the changes I might look for include:

  • Extra help in opening your business. Most franchisors provide some assistance to franchisees when they open their new location. They may be willing to provide you with additional support during your grand opening by having their field personnel be on hand for a longer period of time to provide you with extra guidance and training for you and your staff. 
  • Some franchisors might be willing to contribute money to your grand opening advertising and marketing.
  • Enhanced field support in the early months following your opening is generally something you can request, as great franchisors will view this as benefiting both you and them.
  • If the franchisor is providing you with a protected territory, making the case that your location can support a greater area than provided for in the form agreement is possible. But you will generally have to make the business case for this added territorial protection. This may be difficult or impossible to obtain from larger, more established systems, but is worth asking for in smaller, start-up systems.
  • Modifications to the transfer fee, which may come in handy should you, later on, decide to sell the business to another franchise.
  • Payment terms for your initial fee. While most franchisors will resist this, it is worth asking for given the difficulty some franchise systems are experiencing with their franchisees finding bank financing. 
  • A modification to your franchise fee or continuing royalties, if you are converting your business to the franchisor’s brand.
  • Extended time to cure certain defaults is possible. But keep in mind that franchisors need you to operate your business to their brand standards, and they may look upon this request as an indication that you are not intending to consistently stay in compliance.
  • A grant of a right of first refusal or right of first notice before they sell the franchise in the territory next to yours to someone new.
  • Modifications or elimination of the franchisor’s right of first refusal to purchase your business if you decide to sell your business prior to the end of your term.
  • A waiver or limitation of the personal guarantee most franchisors requires when you sign the franchise agreement.
  • Limitations on your requirement to make an additional investment for capital improvements near the end of your term or for the buyer of your business if you sell before the end of your term.
  • The franchisor’s agreement to grant a new term to a buyer of your franchise if you sell before the expiration of your franchise agreement.
  • If you are a multi-unit franchisee, a reduced royalty as a tradeoff for the franchisor not providing you some services you may be able to provide to yourself, such as staff training and site development.
  • Also, if you are a multi-unit operator, an agreement that your franchise agreement or certain terms of your franchise agreement will not change for each location you develop over the term of your development agreement.

There are certainly other changes you and your lawyer may wish to ask for. For example, one additional area of change may be related to the supply chain requirements in the agreement. Whether you will be able to negotiate changes to your franchise agreement will depend on to a great extent on the maturity of the franchise system you are trying to enter, as well as what you are bringing to the table. Don’t expect large, established systems to make many changes. But, even with larger systems, if you are a multi-unit operator some franchisors will listen to your concerns and make concessions.

Your ability to negotiate changes to your franchise agreement will depend on the maturity of the franchisor, the size of the system, the markets you are entering if their brand is not well known in your area, how many franchises you are acquiring, and whether your requests are reasonable and supported. 

As with any franchise agreement, it is important to have a qualified franchise lawyer working with you. Keep your requests for changes to a reasonable level, as most franchisors, will not consider you a serious candidate if you come to the table with reams of change requests. But if you find that it's easy to get changes to your agreement from the franchisor, don't accept that as a good sign; you want a franchisor that can enforce its brand standards so that you are protected from the bad acts of other franchisees. Besides, they might just be an easy negotiating partner because they need your franchise fee to make next week’s payroll. 

Remember, though, you do not, nor should you ever, enter into any agreement that does not meet your purpose. If there are terms in the franchise agreement that you materially object to, and you can't negotiate with the franchisor changes to their form agreement in your favor, my best advice is not to sign the agreement. Choose a different franchise opportunity that meets your needs, or perhaps decide to go it alone and start your own independent business outside of any franchise system. Down the road, if your business is successful you may choose to become a franchisor - and then you can make the decisions on what is in your franchise agreement and what terms you are willing to negotiate.

Further Reading

Michael Dady, a well known and respected franchise attorney, authored an article on terms in franchise agreements he objects to entitled The Good, the Bad, and the Ugly - Franchise Agreement and FDD Provisions. It is worthwhile also for you to read that article.