Negotiating the franchise agreement – a tough climb
Any thoughts on negotiating the franchise agreement?
Will a franchisor consider negotiating the franchise agreement if they could get something in return? For instance, if sales do not reach “x” dollars by the end of the third full year, the franchise agreement could be canceled. In return, if sales are above x”” dollars, the royalty % could be raised. A similar agreement could be made with the lease term. So my general question would be what are the various exit strategies if you are making no money in a franchise and the lease agreement is for 10 years, the standard for the particular franchise in question. Thanks in advance.
Very few issues will be negotiable (except when?)
Yours is an interesting proposition, but unfortunately, not one that the vast majority of franchisors are going to entertain. The franchise agreement has inherent value from many perspectives and franchisors will be adverse to making changes, unless, as is the case in most human activities, you have a lot more to offer than the other side. Let’s look at negotiating the franchise agreement from a couple of angles. (Better chances for negotiating at the close of the post.)
First, to the general theme of negotiating, you’ll find that established franchisors are unwilling to change even a word because it could leave them exposed to the entire network with regard negotiating new terms. Franchisors spend a great deal of money developing their disclosure documents and franchise agreements, and although offered to prospective franchisees for consideration, are written to favor the creator. You are entitled to review them, critique them, refer them to your attorney, accountant and other counselors, and even request changes, but the bottom line action on your part will boil down to one basic move – accept or reject the opportunity. No franchisor wants to loose a financially qualified prospect, so they will be interested in “discussing” any point you raise, but discussion is where the road will generally end. That’s why they have sales departments.
Second, regarding specific changes to royalty terms, keep in mind that the franchisor has two main sources of income, franchise fees and royalties. In the ideal world, franchise fees should cover the franchisor’s cost of putting you into business (cost of sales, training and set-up), and royalties should kick in as quickly as possible to create support, administration, and profit dollars.
Third, the lease agreement is generally between the franchisee and landlord. The franchisor wants nothing to do with that potential liability except in cases where the franchisee fails and the franchisor might desire an option (not a commitment, but an option) on taking over the location and phone number.
The bare fact of life is that you should expect support from a good franchisor, but the success or failure of your individual unit is your responsibility. If you fail, you fail. Yes, the franchisor will have a failure on its books, but will be looking for the next sale.
Now, here are two (among possibly other) things can change if or when you’re negotiating the franchise agreement. One, if you’re working with a brand new franchisor trying to get the first few franchisees in the door, perhaps a reduced franchise fee (probably not reduced royalties), a larger territory, or maybe access to additional units at lower rates can be agreed upon. But realize that you’re also taking more chances with a new franchisor. If they’re not established its just a greater risk if you can perform adequate due diligence regarding the performance of existing franchised units. And two, if you are buying an existing franchise business, there will be some possible change considerations. Your franchise attorney should be consulted.
A note of caution: If you happen to find a franchisor who’s been around for a long time and willing to bend the rules to gather up your franchise fee — you ought to be thinking hard about running the other way.
And last, if you feel particularly ambitious on this subject, you can begin to study the FTC’s position on disclosure.