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Are Franchise Agreements Negotiable? How to Get the Best Deal

Updated: 3 days ago


Maximizing Your Franchise Agreement: Proven Strategies for Negotiating the Best Terms

As an aspiring franchisee, you may have questions about negotiating the franchise agreement. When entering a franchise relationship, the franchise agreement is one of the most important documents you will sign. While certain terms are standardized across the brand, you may have some flexibility to negotiate aspects of the agreement. With proper preparation and knowledge, you can work to get the best possible deal. Approaching negotiations professionally with a win-win mentality can lead to an agreement that works for both parties. As you consider signing on to a franchise brand, learn how you may be able to negotiate elements of the agreement by understanding which terms are negotiable, developing negotiation strategies, and building a positive relationship with the franchisor.


What Is a Franchise Agreement?


A franchise agreement is a legally binding contract between a franchisor and franchisee that allows the franchisee to utilize the franchisor's established business model and brand. It details the terms and conditions of the franchise relationship, including fees, operational procedures, marketing plans, and intellectual property usage.


Fees and Payments


The agreement will specify initial franchise fees and ongoing royalties payable to the franchisor. The initial fee, typically a few thousand to hundreds of thousands of dollars, gives you the right to open a location under their brand. Ongoing royalties, usually 5-10% of revenue, allow you to continue using the brand and business model.


Operational Procedures


The franchisor will provide strict guidelines around business operations, products and services, store design, employee training, and more. These standards are designed to maintain brand consistency across all locations. Failure to comply with these terms could result in legal consequences.


Intellectual Property


The agreement will grant you limited permission to use the franchisor's trademarks, service marks, trade dress, and proprietary information. However, the franchisor retains ownership of these intellectual property assets. Your right to use them ends if the franchise agreement is terminated.


Restrictive Covenants


Restrictive covenants place limitations around competition, preventing you from opening a competing business or sharing confidential information. These covenants typically remain in effect even after the franchise relationship ends.


A franchise agreement is a complex legal document with serious long-term implications. Negotiating the most favorable terms upfront is critical to your success and independence as a franchisee. Experienced franchise lawyers can help you understand your rights and push back against unfair clauses to get the best possible deal.


Are Franchise Agreements Negotiable?


As a potential franchisee, one of the most common questions is whether franchise agreements are negotiable. The short answer is yes, franchise agreements can often be negotiated to a certain extent.### Contract Terms


The specific terms outlined in the franchise agreement, such as royalty fees, marketing fees, and length of the contract, are typically open for discussion. Royalty fees, in particular, are an area where negotiations are common. Do research to determine average royalty fees for your industry so you can make a case for a lower percentage. You may be able to negotiate a gradual increase in fees over time as your business becomes established.


Exclusivity


Exclusivity provisions that limit your ability to own other businesses may be negotiable. You could ask for a larger territory or the right to open additional locations. If the franchisor is reluctant to give up exclusivity entirely, you may be able to negotiate a time period after which your exclusivity requirements expire.


Dispute Resolution


The sections of the agreement dealing with termination of the franchise and dispute resolution are also often negotiable. You may be able to negotiate a longer period for curing any defaults before the franchise can be terminated or require mediation or arbitration before litigation. You want to avoid provisions that allow the franchisor to immediately terminate your franchise without cause.


While franchisors prefer to use a standard agreement, many are open to negotiations, especially for multi-unit franchisees or those with industry experience. Do your homework, understand your rights under the FTC’s Franchise Rule and your state’s laws, and go into negotiations prepared to argue for the key points that are most important for your business’s success. With the right approach, you can achieve a franchise agreement that benefits both parties.


Key Terms to Negotiate in a Franchise Agreement


Unlocking Success: Essential Franchise Agreement Terms to Negotiate for Your Business Growth

Once you have found a franchise opportunity that interests you, it’s time to review the franchise agreement. This legally binding contract outlines the terms of your business relationship, so negotiating the best deal possible is crucial. Several key terms are worth discussing with the franchisor before signing.


Fees


The initial franchise fee and ongoing royalties are typically non-negotiable, as they are standard for all franchisees. However, you may be able to negotiate a payment plan to pay the initial fee over time with interest. You should also ask about any renewal fees for extending the agreement.


Exclusivity


Exclusivity refers to the franchisor granting you the sole right to operate in a defined territory. Request an exclusive territory that is appropriately sized for your market. Non-exclusivity means competing franchisees could open nearby, impacting your business.


Renewal


The renewal clause specifies your option to renew the agreement for an additional term once the initial term expires. Negotiate the lowest renewal fee possible and the longest renewal term offered, often 10-20 years. This provides stability and the opportunity to continue operating for the long run.


Restrictions


Discuss any restrictions around products/services, vendors, operational procedures, and business decisions to ensure they do not limit your success. Request loosening restrictions where possible while still maintaining brand standards. Some flexibility will allow you to thrive in your local market.


Transferability


Negotiate terms that make it easy to sell or transfer your franchise to a new owner at the end of the agreement. Options like a right of first refusal for the franchisor to buy back your business, minimal transfer fees, and a new agreement for the incoming owner will maximize your franchise’s resale value.


With open communication and compromise, you can negotiate a franchise agreement that benefits both parties. Do your due diligence to understand what is most important for your business’ success so you can thoughtfully discuss key terms and get the best deal.


Franchise Agreement Negotiation Strategies


Do Your Homework


To negotiate effectively, you must understand the strengths and weaknesses of both your position and the franchisor’s. Analyze the franchise disclosure document in detail to determine areas of flexibility and concern. Consult with a franchise attorney to identify clauses that may be negotiable and determine if the agreement overall is balanced and fair. With knowledge on your side, you can craft persuasive arguments to achieve the best terms.


Focus on Key Issues


Rather than renegotiating the entire agreement, focus on the issues that matter most to you, such as payment terms, renewal options, and termination rights. Propose specific changes to those clauses backed by reasonable explanations. Be willing to compromise in other areas in exchange for franchisor concessions on your priorities.


Build a Cooperative Relationship


Frame negotiations in a cooperative, win-win manner rather than an adversarial one. Express a desire to build a mutually beneficial long-term relationship with the franchisor. This approach is more likely to gain their willingness to work with you to find an equitable solution. However, don’t mistake cooperation for weakness—stand firm in advocating for key terms that will allow your business to succeed.


Consider Alternative Options


If negotiations reach an impasse, consider walking away. While a franchisor’s brand and support may seem appealing, their contract terms may prove too restrictive. Exploring your options, including other franchises or starting an independent business, puts you in a stronger position to get the deal you want. The franchisor also risks losing a promising franchisee and may become more flexible to avoid that outcome.


With preparation, focus, and a willingness to consider other choices, you can negotiate a franchise agreement that provides the freedom and resources to build a thriving business. While compromise is often needed, do not settle for terms that endanger your ability to operate profitably and sustainably. With persistence, you can get the deal that’s right for you.


Franchise Agreement FAQs: Your Top Questions Answered


Demystifying Franchise Agreements: Expert Answers to Your Most Pressing Questions

As a prospective franchisee, you likely have several questions about the franchise agreement. This legally binding document establishes the terms of your relationship with the franchisor, so it’s critical to understand it fully before signing.


What are the key provisions I should look for?


The franchise agreement will specify key terms like the initial franchise fee, royalties, territorial rights, renewal options, and termination clauses. Look for reasonable fees, an exclusive territory, the ability to renew, and limits on the franchisor’s right to terminate the agreement arbitrarily.


Can I negotiate the agreement?


Franchise agreements are often presented as non-negotiable. However, franchisors will sometimes negotiate to land a strong candidate. Come prepared with reasonable requests, like a smaller initial fee or territory, and be willing to compromise. An experienced franchise attorney can help determine if terms are negotiable and negotiate on your behalf.


What if I want to sell or transfer the franchise?


The agreement will specify if and how you can sell or transfer the franchise to another party. Look for terms that allow you to transfer the franchise to a third party with the franchisor’s reasonable approval. This provides an exit strategy and helps maximize the resale value.


What happens at the end of the initial term?


Most agreements specify an initial franchise term of 5 to 20 years. Look for a renewal clause that grants you the option, at your discretion, to renew the agreement for additional terms. This gives you more security and stability as a franchisee. If not included, you can request such a clause during negotiations.


What rules will I have to follow?


The agreement will outline the franchisor's operating procedures, brand standards, and other rules to which you must adhere. Make sure you fully understand these obligations before signing, as failure to comply can be grounds for termination of your franchise. Consider if the franchisor’s rules and level of control are reasonable and appropriate for your needs.


With the right knowledge and professional support, you can feel empowered as you enter into a franchise agreement. Do your due diligence, understand your rights, and work to negotiate an agreement that provides the opportunity to succeed and grow as a franchisee.


Conclusion


As you come to the end of the franchise agreement process, remember to stay calm, professional, and focused. There are still opportunities to negotiate terms even at the final stages. Take time to read the full contract carefully, have your lawyer review it, and don't feel rushed to sign anything you're uncomfortable with. Be prepared to walk away if needed. With the right preparation and patience, you can get the franchise agreement that is the best fit for your business. Approach negotiations in a spirit of partnership, aiming for a fair deal that sets up both parties for success. The agreement is just the start of a long business relationship, so focus on building rapport as much as negotiating the details. If you stay strategic and create value on both sides, you'll be well on your way to launching and growing your ideal franchise business.


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