In the world of franchising agreements, what kind of terms are negotiable?
According to one well-respected franchise attorney, “Between the FDD and the franchisee, there is a franchise agreement, and everything there is on the table.” This statement appears to have both a literal and figurative meaning, but the gist of it is this — unless you’re requesting something truly outrageous, you have more leeway to negotiate your terms than you think.
Your negotiating position can vary
Your ability and position to negotiate certain terms of your franchise agreement may depend on whom you’re dealing with. The chance may not be possible with well-known franchise brands that have a waiting list of candidates looking to buy, but emerging brands who desperately want to grow their footprint of franchisees may present an opportunity.
As you review both the FDD and your franchise agreement, it’s advisable to seek the professional services of a franchise attorney who can help determine your outlook and the likelihood of concessions. Keep in mind that the franchisor-franchisee relationship is one that’s supposed to be purpose-built to last, typically 10 years. If you’re going to be partners for that amount of time, you want to establish an open and transparent line of communication.
Related: Consider These Following Points before Signing a Franchise Agreement
What you can negotiate
Some people — for example, those with a sales background — probably understand negotiation better than someone with a non-sales background. However, as long as you think like a salesperson, you’ll get a feel for what you can negotiate. Salespeople want to close the deal and employ a raft of techniques to get it done.
You can emulate some of their tactics, but it’s best to stick to the primary areas of negotiation. These typically include your territorial rights, renewal terms, transfer rights, royalty payments and extensions. That being said, if you spot something in the agreement that doesn’t set well with you, you still have every right to bring it up for negotiation.
Fees and royalty payments
While any prospective franchisee can request a review of fees and royalty payments, your ability to negotiate these terms of your franchise agreement increase if you’re considering a multi-unit play. In that scenario, you have something of value to the franchisor; the possibility of selling in multiple territories instead of just one.
It’s not uncommon to negotiate some leeway into the initial fee range, as well as the planned opening dates, for your subsequent locations. When it comes to the initial fees, don’t expect much in the way of concessions. You’re more likely to get some latitude with royalties.
Related: Seven Winning Negotiation Strategies For Any Situation
Your franchise agreement should specify your territorial rights in detail, typically an exclusive operating area in which you’re free from encroachment from another franchisee. Most involve a three to five-mile radius of operations or zip codes, but some legal experts point to “carve-outs” for non-traditional spaces, such as hospitals, airports and sometimes even mixed-use residential-retail centers.
You can apply to have those spaces reserved exclusively for your operation. As a guideline, just make sure that what you’re proposing is mutually beneficial to your franchise and the brand.
What if failure is not an option?
Some franchisees raise a legitimate concern about the possibility of business failure, especially in light of a 10-year term spelled out in the agreement. As a franchisee, you understand your obligation to remain a contributor to the brand so long as business is good. But if it isn’t, it’s also important to understand your obligation to continue operating when you’re not turning a profit. Get clarity on whether or not you’re personally on the hook for damages. If so, you may be able to negotiate a cap on liquidated damages.
Your ability to negotiate is dependent on many factors and anything you propose must be seen as a reasonable request. Sometimes, it’s the smaller things that are easiest to gain a concession — such as additional funds for your grand opening and more oversight for your first few months in business. These areas are much more malleable than fees and royalties, so be sure to manage your expectations reasonably before you propose any changes.
Related: 8 Negotiating Tactics Every Successful Entrepreneur Has Mastered