Tuesday, January 18, 2011

Negotiating Franchise Agreements

Are Franchise Contracts Negotiable? Most individuals assume answer to this question is a resounding no. Why would a giant franchisor want to negotiate with a potential franchisee who isn't even a part of the organization yet? Aren't we talking about a David versus Goliath situation here?

Unfortunately, yes. Many franchises are very large and sign hundreds of contracts every year. They usually don't have the will or the time to fine tune each contract to fit the individual franchisees. Hence, in most cases it is very difficult for a franchisee to negotiate out of paying the normal starting fee to buy into the national advertising fund. The franchisor generally sets up standard fees that it expects every franchisor to agree to before starting business. This is a general rule that most franchisors seem to follow.

However, every rule has its exceptions, so in some rare cases it may actually be worth it to give negotiating your contract a try. If there are extenuating circumstances you may have a chance of saving yourself a good deal of money. You just need to know when negotiation is appropriate and when it is not. Here are a few things that you should think about when you are considering negotiations:

  1. The Maturity of the System:  If the franchise you are planning to go into business with is extremely well established, you will face more of an uphill battle than if you are working with a franchise that has only been around for a couple of years. Franchises with hundreds of units or so generally have the leverage to impose whatever stipulations they choose. They take a “my way or the highway” approach because they know that there are twelve more people in line behind you who would love to take the deal that they are currently offering you. If this is the case, it might be best to simply give in and pay the regular fees and royalties.
  2. Attorney Involvement:  You can hire an attorney to bargain on your behalf, but remember that this can quickly become a major expense. Do you really want to pay a lawyer by the hour to negotiate your contract? This may end up costing more than it's worth when all is said and done. My advice is that you do the bulk of the negotiating yourself. You probably understand the nature of your business and the challenges you are likely to face much better than any attorney. Bring in your lawyer as a sort of ninth inning closer to do the final work of sealing the deal and drawing up the paper work, not doing the bulk of the negotiation.
  3. Territory Differences:  In some rare cases, you may be able to make the argument that your contract is too constrictive for the territory where you are setting up shop. If your territory is thinly populated, and if there aren't too many people out there bidding on it, you may have a small amount of leverage. You aren't likely to have your initial fees canceled, but you may be able to get the franchisor to give you a little extra time before your royalty responsibilities kick in. But beware, if you are dealing with an established franchise that has dozens of potential franchisees waiting in line behind you, negotiating your contract will be very difficult no matter what the circumstances.
  4. Don't Make Assumptions: You shouldn't assume that any element of your contract is negotiable. On the other hand, there's no reason to fully assume that any element is not negotiable. If you feel that something in the contract is unfair, it never hurts to try to negotiate. Now I won't lie to you, most of the time you will get turned down, but the one or two times that you are not will make it worth it.
  5. Talk to Other Franchisees:  Try talking to two or three current franchisees and ask them if they were able to negotiate their contracts. If the answer is no in every case, you might as well give up. But on the other hand, if one or more of the franchisees you speak to was able to make the franchisor budge, this is a good sign. Get as much information about these past negotiations as you can so that you will know what to expect when you sit down with the franchisor.
Remember that no deal you broker will ever make you completely and totally happy. If the franchisor is unwilling to negotiate, this is probably simply a result of them having figured out what works over years of fine tuning. If everyone else is getting the same exact deal, you really have very little to complain about. In the end, you may have to simply decide if you are willing to take their contract without making any adjustments. If not, you may may want to try a different franchise.

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