Many franchisors tend to consider their franchise agreements as contracts that are never negotiated with prospective franchisees.
Having acted for both franchisors and franchisees over the past 26 years – though not at the same time or on the same file – these agreements are often negotiated, but not in ways you might think.
The CEO of a large franchise business once said, “what you don’t ask for, you’ll never get,” meaning he expected franchisees to try to negotiate some aspects of the deal. “I can always say no,” he added.
Some franchisors treat their contracts as standard form documents and never entertain changes. Others only consider changes in the right circumstances for the right franchisee. Prospective franchisees have tried to negotiate deals with large franchise chains that have a reputation for never negotiating their agreements. But they inevitably do, though nobody calls it a negotiation, of course.
Having your lawyer prepare a 12-page letter outlining dozens of points that should be changed in an agreement package a franchisor paid its own lawyers tens of thousands of dollars to prepare is a great way to receive a very curt “ thanks but no thanks.” If the letter is answered at all.
Out of the two dozen modifications you or your lawyer might have wanted in a perfect world, there may be four or five big points the franchisor might be inclined to change to get the deal done. It depends on a lot of factors, including the corporate culture of the franchisor, how “new” it is to franchising, and what you bring to the table. If the deal is an area development franchise or a master franchise as opposed to a one-location franchise in a food court, almost everything is on the table.
With a one-location unit, in my experience, franchisors will rarely, if ever, agree to a concession on continuing royalties. It creates problems in the entire system if one franchisee is getting a better deal than another. I’d leave it alone. If you think it’s too high, find another franchise.
In terms of initial franchise fees – the fee the potential franchisee pays at the outset for the right to become a franchisee – they are rarely the subject of negotiation. The only exception might be if the franchisor is a start-up, doesn’t have any franchisees, and may be prepared to make a deal to get established. For established systems with more than just a few franchises operating, don’t waste your time.
Don’t have your lawyer waste the franchisor’s time either. It suggests you, and your lawyer, are inexperienced.
If you’re acquiring more than one location, some franchisors may entertain a lower initial franchise fee for additional locations because the franchisee has already been trained – training is often incorporated in the initial fee. Some franchisors even provide for it in their agreements. So if you’re interested in more than one location, you may have some leverage on the initial fee for subsequent ones.
Advertising fees – a regular amount the franchisor collects from all franchisees to allow it to build sufficient funds to advertise the entire system in high-cost media – is something worth assessing. For example, if the franchise system only has three locations, there isn’t the critical mass required to create a fund large enough to advertise in that high-cost media.
So a legitimate point to negotiate is to defer the instigation of that fee until there are a sufficient number of locations to justify the collection. In the meantime, the money that would have been directed to the advertising fund could be directed to local advertising in the franchisee’s market.
There will undoubtedly be other fees payable to the franchisor by the franchisee. And if you’re in Alberta, Ontario, New Brunswick, PEI, or Manitoba (after Oct. 1, when franchise disclosure regulations come into force in that province), fees will be specified in the franchise disclosure document (FDD) that franchisors must provide to prospective franchisees before an agreement can be entered. The FDD might disclose other fees that are eyebrow-raising and suggest nickel and diming.
For example what does the franchisor do to warrant payment of a technology fee? Maybe it’s totally justified, or maybe it’s something that can be negotiated away. Do you really have to pay for the preparation of the actual franchise agreement?
In any event, read the franchise agreement and disclosure document and hire a lawyer with experience in franchising so you can determine which issues you might get concessions on and the ones you’re wasting time and resources on.
Special to The Globe and Mail
Tony Wilson practices franchising, licensing and intellectual property law at Boughton Law Corp. in Vancouver, an adjunct professor at Simon Fraser University, and the author of two books: Manage Your Online Reputation , and Buying a Franchise in Canada . His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.
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