Franchise Negotiation Tip: Be Willing to Walk Away

Prospective franchisees are often under the mistaken belief that franchise agreements are not negotiable. That's often true even after a franchisor says initially that it will not negotiate a franchise agreement. 

So what's one key in obtaining concessions in your franchise agreement?

Be willing to walk away.

It's true of any negotiation. If you are willing to walk away empty handed, you are often much more likely to get a better deal. You are probably in the strongest negotiating position when you don't care whether you become a franchisee or not. However, it is rare that a prospective franchisee takes this position. Usually the the prospective franchisee wants the deal and the franchisor knows it. Without the sense that you are willing to walk away, a franchisor has little incentive to concede on issues in the franchise agreement.

Franchise agreements are generally far too one-sided. Some concessions are generally in order. Don't make the mistake of going blindly into franchise ownership. Get legal representation from an experienced franchise lawyer and understand the provisions of the agreement. And if the franchisor isn't willing to work with you on language in the agreement, perhaps it isn't the right franchisor for you. Demonstrating that you're willing to walk away from the deal can be a very powerful negotiation technique under the right circumstances. Of course, you must be willing to do just that with an understanding that maybe it just wasn't the right deal. In my experience it's the rare person that can do this. But perhaps it helps illustrate why most businesses (even franchise businesses) fail.

 

Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Wanted: One Woman. One Franchise

Joel Libava a/k/a The Franchise King is running a great contest for prospective women franchise owners. It's called the ONE WOMAN. ONE FRANCHISE Contest. Joel is looking for one woman who is ready to make the commitment to be a franchise owner. He's going to help that woman choose, research and buy a franchise.

Joel is helping celebrate the launch of his new book, Become a Franchise Owner. I've read it and if you're interested in franchising, I recommend you read it too.

I have agreed to help out the contest winner with a franchise disclosure document and franchise agreement review. Several other sponsors are assisting as well including a business formation from CorpNet, a press release from Ignite Venture Partners, a six month subscription from Live Plan to assist with business planning, a consultation with online marketing expert Matt Mansfield, and a free book on finance from Nicole Fende.

Should be a great opportunity for one lucky prospective woman franchise owner. Register today!

Good Habits of Successful Franchisee Representation

At this past week's ABA Forum on Franchising I attended an insightful presentation with Michael Levitz, Kenneth Milner and Robert Purvin.  Purvin is from the American Association of Franchisees and Dealers which has some helpful tips and resources on its Web site to evaluate franchise opportunities.

While the presentation covered many areas of successful franchisee representation the concept of assembling a team to evaluate the franchise was probably most important.  In addition to the franchise lawyer, the presenters said successful franchisees will also contact the following:

  1. Accountant - to examine the financials of the franchisor, costs and expenses to buy the franchise and financial projections of the business.
  2. Real Estate Agent - to help you decide which location is best for you.  It is a mistake to rely completely on the franchisor in this context.  Most franchisors will be from out of the state and probably do not have a complete handle on the real estate market or trends in the community.
  3. Marketing Professional - evaluate the marketing plan of the franchisor, develop your own marketing plan and assess whether the franchise opportunity is right for your region of the country.

I would also add that each prospective franchisee should also have a banker and an insurance agent to help them along in the process.  Assembling the right team is critical to success.