Updated September 2024
A franchise agreement is a legal contract between a franchisor and franchisee that outlines the terms and conditions under which the franchisee can operate using the franchisor’s brand and system. The agreement is crucial for defining the business relationship and protecting both parties’ interests.
Franchising at its core is being able to replicate a successful business model on a consistent basis. Negotiating a new agreement for each franchisee would be counterproductive. To keep things consistent and easy to replicate, franchisors rely on franchise agreements that are the same no matter who signs the agreement. Known as “adhesion contracts,” they are designed to prevent having to negotiate each individual contract.
All that being said, in some situations it’s possible to negotiate certain aspects of a franchise agreement, particularly if you’re joining a new franchise that is just getting established. However, make sure you limit your requests to things that won’t compromise the franchise’s ability to maintain consistency.
4 Key Areas to Negotiate
#1 – Franchise Fees & Initial Investment
It’s worth asking for a breakdown of the initial fee to understand its components. While franchises don’t typically negotiate the initial fee and payment terms, they might if they find franchisees are having trouble getting financing from a bank. You might also be able to request a reduction or deferment of part of the fee, especially if you bring something valuable to the table such as strong market connections or a premium location.
Furthermore, if you plan to become a multi-unit owner, you might be able to negotiate a reduced royalty fee since the franchisor won’t have to provide certain services to you for additional locations. You’ll be able to handle things like staff training and site development yourself.
For royalty fees, you could propose a sliding scale royalty structure, where lower rates apply in the first few years as you establish the business.
Additionally, if you have an existing independent business that you decide to change to a franchise, it might be possible to negotiate the initial franchising fee and ongoing royalties.
Finally, make sure you request transparency around additional costs such as training fees, equipment costs, and ongoing support fees. Consider negotiating for cost-sharing in areas like marketing or technology systems.
#2 – Territory Rights & Exclusivity
You should make sure the franchise agreement includes defined territorial boundaries with a minimum radius to avoid competing franchise units. You might also be able to negotiate terms where the territory size increases as your franchise grows.
Additionally, if you have an area of exclusivity where other franchisees in the same system will not be allowed to operate, you may be able to get that expanded. Do your research so you can prove that it makes sense business-wise for the franchise to expand your area of exclusivity.
You may also be able to get a grant of first refusal rights, which gives the franchisee the opportunity to purchase, take over, or expand into additional franchise locations or territories before the franchisor offers it to other potential buyers.
#3 – Duration & Renewal Terms
If you’re unsure about a long-term commitment, consider asking for a shorter initial term as well as options to exit the agreement without severe penalties.
Additionally, you should ensure that the renewal terms are clear in the agreement. Try negotiating favorable renewal fees ahead of time to avoid a large increase in costs.
#4 – Marketing & Advertising Support
Franchisors typically assist franchisees when they open a new location. You might be able to convince them to prolong this period of help by having their field personnel stay longer to provide you and your staff further guidance.
Additionally, some franchisors will also provide financial support for the advertising and marketing of your grand opening. You may be able to negotiate the specific level of support they provide. A few other areas to negotiate related to marketing include:
- Your Contributions – Request that a portion of your contributions towards the franchise’s marketing fund be allocated to local efforts in your territory and not just towards national campaigns.
- More Control – Negotiate for increased control over local marketing spend and approval of specific campaigns.
- Ensure Alignment – If the franchisor mandates spending on certain channels, ensure these align with your local market’s needs.
- Brand Guidelines – Try to gain flexibility in tailoring marketing to the local audience while staying within brand standards. This will help you appeal to regional customer preferences and boost sales.
No matter what, ask for transparency regarding how the marketing funds are spent.
Ready to Buy a Franchise Business?
A well-negotiated franchise agreement can be the key to long-term success. Make sure you are fully comfortable with all terms and conditions before signing the agreement. If you’re not satisfied and negotiation isn’t possible, then it might be best to consider a different franchise option. Let FranNet help you find the right opportunity. Our expert franchise consultants are here to walk you through the process from start to finish. Schedule your free consultation today!