When pursuing a franchise opportunity, many franchisees are overwhelmed by the amount of paperwork involved and often forego the opportunity to negotiate better terms under a franchisee agreement, simply because they are in a rush to get the deal done.
Also, many franchisees simply assume that franchisors have a “take it or leave it attitude” and don’t bother making the effort to negotiate more favourable terms.
What is negotiable?
Whilst the franchisor’s Disclosure Document sets out prescribed and valuable information regarding the franchisor and the franchise system, it is the franchise agreement that regulates the relationship between franchisee and franchisor.
Once you have signed the franchise agreement your ability to renegotiate the terms at a later stage is limited and may be costly. Therefore, working with an experienced franchise lawyer, prior to signing the franchise agreement, can help you understand what type of changes your franchisor may be willing to consider and help you to ensure that those changes are properly incorporated in the franchise agreement.
There are a number of areas to address when negotiating a franchise agreement. Below we have listed some for you to consider:
Upfront and continuing fees
Most franchise agreements allow the franchisor to charge an array of upfront fees such as an initial franchise fee, training fees, fit out costs and continuing fees such as monthly royalties, management fees and marketing levies. Often when properly motivated, franchisors are prepared to agree to reduced fees or other concessions. For instance, it is common for franchisors to sometimes agree to deferred royalty fees whilst a franchisee establishes its customer base during an initial start up.
Your franchise territory is the heart of your business. It is therefore crucial that you understand and negotiate the best definition of your territory to avoid any misunderstandings. Also, sometimes territories are non- exclusive which means that your franchisor can grant another franchise in the area in which you conduct your business. Negotiating a precise and/or exclusive territory, if your franchise agreement does not allow for this, may add significant value to your business and may assist to eliminate disputes with your franchisor or other franchisees down the line.
The Franchising Code does not give franchisees an automatic right to renew or extend a Franchise agreement. Your renewal rights will therefore depend on the terms of your individual franchise agreement. For a franchisee the right to a renewal or an extension is crucial to ensure that it can continue operating the business and possibly sell the business for a profit in the future. Therefore negotiating this with the franchisor upfront and at the outset may eliminate disappointment in the long term.
Selling your franchise business
Your franchise agreement may limit your ability to transfer your franchise business to another person and stipulate certain conditions, such as seeking the franchisor’s consent to a transfer and payment of a transfer fee. Negotiating a reduced transfer fee and understanding these issues upfront may come in handy and may reduce the risk of a subsequent sale being cancelled or delayed.
Term of the franchise agreement
Signing a lease is a serious commitment and if the franchise business fails the franchisee will be accountable to both the Franchisor and the Landlord. Changing the term of a franchise agreement to match the term of a lease is therefore critical. Also lining up renewal options of the franchise agreement and the lease are often overlooked and should be negotiated to ensure that there is a valuable asset to sell in the future
Personal Guarantee obligations are quite common in franchise agreements. A personal guarantee means that you as guarantor agree to be personally liable to meet the franchisee’s obligations under the franchise agreement, thereby putting your personal assets on the line for the franchisor to recover its losses.
Often personal guarantees are very broad. Some guarantees may even contain “charging” clauses, which allow the franchisor to take a charge over any real estate you may own. You may be able to negotiate limits to the scope of your personal guarantees or negotiate an alternative such as a bank or a corporate guarantee in some instances. In any event it is very important that you obtain legal advice and financial advice about asset protection measures before offering a personal guarantee.
Legal advice an expense?
Failing to take legal advice prior to signing a franchise agreement may deprive a franchisee of the opportunity to negotiate the best franchise deal in the circumstances. Viewed in this context legal advice should not be viewed as an expense but rather an investment and may pave the way to a much more happier relationship with a franchisor.
If you require legal advice, please contact Christine Matsinger of our office today.