What's Negotiable When Buying a Franchise?

When you are buying a franchise, you have more power than you may think in the franchise sales process. The franchisor is in the business of making franchise sales, and in today’s economy, that has become more difficult. Franchisors are working harder to make sales, holding their breath as they bring a prospect to the closing table, and hoping the sale will go through.

But for a host of reasons, most prospective franchisees never realize they have opportunity to negotiate the terms of

a franchise agreement. The Franchise Disclosure Document (FDD) is required to be in plain English, but the agreement isn’t. It is usually presented in full legalese, impenetrable and near impossible for the non-lawyer to read, let alone understand. The contract is presented as a uniform – and uniformly accepted - document: “It’s what everyone signs,” the franchisor says.

Sometimes they’re right; but more often than you might expect the terms are negotiable--if that’s what it takes to close a franchise sale.

You may hear a lot of reasons why the agreement cannot be negotiated:

“We want everyone under the same system.”

“The lawyers won’t let us touch a thing.”

“My boss would kill me if I brought back a bunch of revisions.”

Franchise documents carry what negotiation theorists call “the authority of the printed document.” The franchise disclosure document and the form contracts it contains are intimidating. You know the routine: “Hey, this is all printed up. It’s a form. Change it? We can’t change it, my friend, it’s printed.” The very fact that it is printed up and part of a fat disclosure document conveys the very powerful idea that it cannot be altered.

Franchisors do have some very genuine reasons as to why they do not like to see the terms of the agreement changed. Involving their own lawyers in responding to proposed changes adds the expense of legal fees to the franchise sale—expenses that the sales program is not usually structured to carry. Negotiated changes create variables in their systems that can be devilishly difficult to administer, and in one state, California, there are regulatory consequences: subsequent disclosure of negotiated changes. Franchisors like having all of their franchisees on the same legal footing (even though, if truth be told, there is often substantial variation from one franchisee to the next). Franchisors know that franchisees compare the “deals” they got when gathering for system conferences, and variations can cause resentment and bitterness.

So, can you negotiate a franchise agreement? I have represented some well-established franchisors that have flat no-negotiation policies (at least outside of Virginia, where negotiation is required by law, on pain of the franchise agreement becoming “voidable”). Other companies, usually younger and hungrier for the sale, want to hear what the prospect and his or her lawyer have to say.

It boils down to this: It doesn’t hurt to ask. Lawyers experienced in this field know that even if the franchisor flatly refuses to negotiate, walking a prospect through the items that the lawyer would like to see changed, and presenting those points to the franchisor, is a good way for the prospect to understand some of the most important features of the franchisor–franchisee contractual relationship. Not only does it not hurt to ask, it usually helps the prospect understand the relationship he or she is buying into.

If the franchisor is willing to negotiate on the agreement, there are some topic areas that are more likely to be acceptable to the franchisor than others:

• The initial fee is more likely to be reduced than the continuing royalty fee rate.
  
• The territory geography is more likely to be altered by the franchisor on your request than the scope of the rights and protections enjoyed within the territory.
  
• The timing of opening for business more likely to be negotiated by the franchisor than the grounds available for termination by the franchisor.
  
• Franchisors will rarely, if ever, negotiate on the trademark provisions.

Yes, franchise agreements are certainly negotiable. You may indeed get turned down, but it really never hurts to ask. Just remember that as a prospective franchisee you have a remarkable source of power: The franchisor does not want you getting up from the table and walking away from a franchise sale.

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Andrew Caffey is one of the nation’s leading franchise legal specialists; he represents franchisors across the United States. Caffey served as General Counsel of the International Franchise Association, a member of the Governing Committee of the ABA Forum on Franchising, and Chair of the ABA Forum on Franchising. He also is a member of the bar in Maryland and the District of Columbia, and a member of the Panel of Neutrals of the American Arbitration Association. Caffey is a frequent speaker and author on subjects of franchise and business opportunity regulation.