How to Negotiate a Franchise Agreement

Sep 14, 2017 | General

Because franchising is meant to expand a business by allowing it 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 they enter into an agreement with. Known as “adhesion contracts,” they are designed to prevent having to negotiate each individual contract, essentially making them form contracts.

If your lawyer isn’t familiar with franchising, they might balk at having you sign one of these agreements, because they are written from the company’s standpoint and are designed to be protective of the franchise’s brand and operating system. Lawyers who don’t deal in franchising much will sometimes spend time reviewing these contracts and taking note of changes they believe need to be incorporated only to be told that the agreements are non-negotiable.

A major franchise (one that is big enough to be known as a household name) will almost certainly not budge on its agreement. You want into the franchise, you sign the agreement as is. Period.

However, if you join a new franchise that is just getting established, you may have a little bit of wiggle room because they’ll be more willing to make some compromises to attract franchisees. But, be careful if a franchise seems little too willing to negotiate every aspect of its agreement. This could mean the franchise is not confident in its own operating system and the strength of its brand. If it’s willing to forego its own set of rules and standards so easily, that also might mean it will have trouble enforcing consistent standards across the franchise.

You need not just accept the franchise agreement the way it is. It never hurts to ask if you can get certain things changed, even in larger franchise systems, but limit your demands to things that will provide real benefit to you without compromising the franchise’s ability to maintain consistency.

It’s not uncommon for franchisors to make minor changes. Some of these changes you could try to negotiate are:

Extra Help When Opening Your Location

Franchisors will offer you at least some help when opening your business, but if you feel like it may not be enough, you can try to get them to commit to having their field personnel on hand for a longer period of time than they usually do. This will give you and your staff added guidance when getting started and shouldn’t be too much to ask for. 

Some franchisors may also be willing to provide more financial support for the advertising and marketing of your grand opening and enhanced field support during the early months of your business in that critical period when you’re getting your legs under you.

A Larger Exclusive Area

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. Rather than just asking for this, though, you should have research to back up your request to prove that it would make good business sense to the franchise to expand your area of exclusivity.

Modifications to Fees

When dealing with money, it’s always tricky, but you can still try to ask for these things to be modified. Transfer fees, which will only come into play if you decide to sell your location to another franchisee, might be negotiable.

You may also be able to make some changes to the payment terms of your initial fee. This is not something franchises will normally negotiate on, but they might if they find franchisees are having trouble getting financing from a bank. 

If you have an existing independent business and you decide to change it to a franchise, you may be able to negotiate the actual amount of your initial franchising fee and the ongoing royalties you pay to the franchise.

Modifications to First Refusal Rights

You may be able to get a grant of first refusal rights if the franchisor is selling a location in the territory adjacent to yours so that you can be the first to buy it and expand your own franchise footprint.

Another right of first refusal you may be able to have altered is the franchisor’s right of first refusal for purchasing your business if you decide to sell it prior to the end of your franchise agreement. You’ll likely get a better deal when selling it to someone else than if the franchisor were to buy it.

Multi-unit specific items

If you are looking to become a multi-unit owner, you might be able to negotiate a reduced royalty fee as a tradeoff for the franchisor not having to provide certain services to you like staff training and site development for locations that open after your first one, since you’ll be able to handle those yourself. 

You might also be able to get your franchisor to agree that they will not change your agreement (or at least certain terms of it) for each location you develop.

Other Miscellaneous Items

Some other modifications you may be successful in requesting are a waiver or at least a limitation of the personal guarantee many franchisors require from franchisees when signing a franchise agreement.

You might be able to set some limitations on the requirement for you (or a buyer of your business if you choose to sell it) to make an additional investment for capital improvements near the end of your franchising term. And you may be able to negotiate the franchisor’s agreement to grant a new term to someone who purchases your franchise if you sell it before your agreement expires.

You may find other areas where you want to ask for changes, but keep your demands reasonable and limited. How much negotiating power you have will largely depend on how big and well-known the franchise is. Ultimately, if you are unsatisfied with anything in the agreement and the franchisor isn’t willing to change it, don’t sign it. Find a different franchising opportunity that you are more comfortable with. FranNet can help you find the perfect franchise to connect with. Sign up for a free FranNet franchise search and consultation today.