Negotiating the Franchise Agreement When Things Get Normal

As we move beyond the COVID-19 crisis and resume some sort of normalcy, franchisors will inevitably ramp up or restart their franchise development activities. Their objective will be to regain their franchise system growth  from prepandemic times, and in some cases to replace franchisees who had to exit their system during coronavirus constraints.

In addition, the sale of new franchises will generate additional franchise fees and establish a base for more royalty revenues, acting as a buffer against unavoidably weak franchise sales over the past few months.

Against this backdrop, franchisors may be willing to negotiate certain terms of their franchise agreement, including some points that previously might not have been on the table. In the case of Emerging franchise systems, selling franchises will be more urgent and competitive, as more franchisors seek to continue their sales trajectory from months leading up to the pandemic.

It can be advantageous for a franchisor to concede some initial changes to their franchise agreement, in return for adding a qualified franchise candidate to their network for many years.

Because a franchise agreement is a legal contract which requires certain obligations be fulfilled and responsibilities met, as a prospective franchisee, you need to be comfortable with its provisions. To achieve this comfort level, you and your attorney should request the franchisor to change or amend certain terms of the franchise agreement.

Keep in mind that franchisors are guided by franchise regulations, state statutes and good business practices, when making changes to their franchise agreement. However, certain provisions can be negotiated and changed. A number of franchisors will have the flexibility to negotiate some terms of their franchise agreement, while others will not.

Before negotiating the franchise agreement, engage an experienced franchise attorney to review the document. Don’t be shy—avoiding some legal costs in the franchise process could cost you more in the long run. Confirm that the franchisor will negotiate terms of the franchise agreement. Some franchisors will not negotiate certain points, including:

1. Royalties and continuing fees.
2. Initial Franchise Fees.
3. Default and termination provisions.
4. Non-disclosure and non-compete provisions.
5. Legal venue.
6. Franchise site-location size, location and décor.
7. Restrictions on products and services that can be sold.

Other terms may be negotiable, including:

1. Financing of the initial franchise fee over a short period of time.
2. Deferring a portion of royalty or advertising fund fees for the first few months after franchise opening.
3. Size of the territory.
4. Request for a cap or limit of the franchise Personal Guaranty.
5. Request that a failure to meet, for example no less than 75% of advertising spending requirements, won’t be grounds for default.
6. Obtaining a right of first refusal for adjoining territories, which are open and not yet franchised.
7. Request language that doesn’t require you to indemnify the franchisor if you follow the procedures and policies of the franchisor.
8. Some franchisors are willing to grant changes to the Transfer and Assignment section, which defines the time that the franchisor can exercise their right of first refusal. For example, extending to 90 days versus 60 days.