How to Negotiate the Terms of the Franchise Agreement

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Franchise agreement issues to be aware of

    The franchise agreement is one of the most important documents for an investor launching a business under an existing brand. It’s a key part of the franchising process, and a way for the franchisor to make sure standards are consistently high across the network. But there are areas you can negotiate to get a better deal as a franchisee.

    The franchise agreement outlines the franchisor-franchisee relationship in legal terms and lists the rights of each party. Investors should never sign the contract before fully understanding it, so it’s important to consult a legal professional with franchise experience. 

    Many franchisees decide not to discuss the franchise agreement with an expert because they don’t realise it can be negotiated and adapted - but they’re wrong. Getting as much information and support as you can is vital, as it’s important you’re able and willing to fully comply with the contract. 

    Aspects to negotiate in your franchise agreement

    The franchise agreement allows the franchisor to set rules and restrictions, and stop investors introducing substandard working practices across the network. It’s a key tool when it comes to maintaining consistency and protecting the brand’s reputation. So, it should come as no surprise that franchisors will be reluctant to make significant changes to the document. 

    Usually, a franchisor’s unwillingness to negotiate a franchise agreement is a very good sign. It means they’re likely to have upheld restrictions across other business units, which bodes well for the success of the franchise as a whole. However, there are aspects of the contract they will be more inclined to adapt, which you can use to your advantage. 

    In general, aim to contest restrictions to do with your specific business unit, rather than demanding changes to the entire network. For example, you could ask for: 

    • More support as you set up and develop your business

    • Financial aid during the initial set-up stage to cover marketing or other areas

    • A larger territory or exclusivity

    • Changes to the payment terms for the initial franchise fee or ongoing royalties

    • Limits to the financial guarantees requested by the franchisor

    • Extensions for maximum contract periods 

    • Changes to restrictive covenants, such as non-compete agreements preventing you from launching an independent business in the same industry for a certain number of years after leaving the franchise 

    • Right of first refusal if other franchise units go up for sale in a neighbouring territory

    • Changes to transfer fees or how they’re paid to save you money if you sell your business

    • The removal of the franchisor’s right of first refusal if you sell your business, or their right to pay a depreciated value as opposed to a fair market price

    If you’re becoming a multi-unit franchisee with a number of businesses under your wing, you could also ask for: 

    • Consistency in agreement terms across your businesses

    • Changes to a fast-paced business launch schedule, to allow at least a year between the opening of each new business

    • Reduced royalties where you won’t need the full investment package, including training and business support, etc. 

    • Advanced protection for the territories of business units in the pipeline

    • Amendments to a ‘cross-default’ clause, which would allow the franchisor to buy back all your units at depreciated value if just one of them fails 

    Factors influencing the success of your negotiations 

    Your ability to achieve your goals when negotiating may be affected by: 

    • The age and experience of the franchise

    • The size of the franchise

    • The industry it operates in

    • Brand awareness in your area

    • The number of units you’ll set up

    • The requests you make and whether they’re reasonable

    How to negotiate

    Fighting your corner with a franchisor can be nerve-wracking, but as long as you remain calm and clear-headed, you’ll be able to proceed with negotiations effectively. You don’t want to risk damaging your relationship with the franchisor, so it’s worth reading up on these top tips for negotiating a franchise agreement: 

    • Choose your battles - Demonstrate respect for the franchisor and personal credibility by raising a few reasonable requests, rather than walking in and trying to transform the franchise from top to bottom

    • Do your research - If you don’t have a thorough understanding of the franchise, you risk making unfeasible or embarrassing requests 

    • Plan ahead - You’ll be more likely to leave with the results you want if you know your ideal outcome and are prepared for the discussions

    • Use logic and reason - The franchisor will be more willing to negotiate with you if you base your arguments in fact, rather than emotion

    • Focus on the key issues - When you’re discussing a document as extensive as the franchise agreement, it can be easy to get side-tracked, but keep your main requests in mind for a productive conversation 

    • Build a rapport - Although you’ll want to be firm, there’s no need to be aggressive; remember, you’re negotiating with someone you’ll need to work closely with in the years to come

    • Listen - Negotiation is a two-way conversation; making sure you’re only doing 50 percent of the talking during the meeting will help you establish a mutually beneficial working relationship

    • Make notes - At the end of the discussion, jot down the outcomes of the meeting so you can remember your final decisions as you adapt the franchise agreement and move forward

    Become a franchisee

    The franchise agreement is often a lengthy document and can be difficult to interpret at times. We always recommend you seek professional guidance before you sign on the dotted line - not only to suggest amendments, but to make sure you understand your obligations too. The British Franchise Association has a list of trusted specialist franchise solicitors who are able to review the franchise contract with you. Head to its website to get started. 

    Here at Point Franchise, you can find a wide selection of articles designed to help investors become franchisees. We also list reputable franchises offering agreements for new territories - discover opportunities in your local area or preferred sector by using the drop-down menu on the left. 

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