Can You Negotiate a Franchise Agreement?
I get this question all the time from prospective franchisees and the answer is this:
Yes you can negotiate your Franchise agreement, but only if the Franchisor is willing to follow the required procedure.
California, and several other registration states require a franchisor to register their Franchise Disclosure Document (FDD) with a governmental agency before offering or selling franchises in that state. The FDD contains the form of franchise agreement, which must be offered to prospective franchises.
Thus, when a franchisee seeks to negotiate terms, the franchisor might properly reply we are not allowed to change our agreements because they are registered with the state. This usually ends the discussion, but it is not completely accurate.
California allows for several procedures that allow a Franchisor to change terms of a franchise agreement, or negotiate certain terms different than it form. The process is utilized by franchisors all the time that understand the process. However many franchisors do not want to go through the hassle, and frankly don’t want to negotiate so they will take a hard line stance.
On the other hand, many new franchisors will negotiate not understanding the laws nor complying with the required procedures, particularly with their first few franchisees. This is a risk to the Franchisor that its actions might violate franchise registration laws, and while it is a benefit to the new franchisee with ore favorable terms, the terms may or many not compensate enough to minimize the risk the franchisee is taking with a new franchisor.
There are other exemptions for negotiated terms, for example, in cases of a settlement of a dispute, a renewal of the franchise term, or changes terms for all franchisees to their benefit, among a few.
Franchisees should always ask, after first having an experienced franchise attorney review their FDD and Franchise agreement for any red flags and alarming or confusing or conflicting provisions. Sometimes it is easier for a Franchisor to issue a letter of clarification on items that are not being materially changed.
Franchisees should always ask what other negotiated sales the franchisor has made and specifically what terms were negotiated. The Franchisor is required to disclose this information if it has made negotiated sales in the past but again, new franchisors do not realize this requirement.
There may be opportunities to negotiate a franchise agreement terms but it is wise to focus on provisions that would be problematic in the future such as certain transfer restrictions, or a limit on certain required upgrades in the future, or a limit on certain increases in fees in the future, or a right of first refusal on adjacent territory, or different renewal term, or perhaps changing the length of the agreement, rather than the obvious franchise fee and royalties. Focus on provisions that won’t “cost” the Franchisor anything but will give you, the franchisee, a benefit, and the Franchisor may be more amenable.