A shoot I did For Kudo Marketing
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One of the biggest mistakes prospective franchisees make is accepting the first “no” from a franchisor.

I’ve written about this before. I’ve told prospective franchisees that even when a franchisor says its franchise agreement is nonnegotiable, they should not necessarily accept that answer.

Recenty, a client took that advice. And the results were even better than I expected.

We negotiated several significant changes to a franchise agreement after initially being told that the franchisor would not negotiate. These were not cosmetic changes or minor adjustments to the language. They were meaningful concessions that substantially reduced our client’s financial exposure and provided greater certainty about the business relationship.

Three changes in particular stood out.

And they offer some important lessons for anyone considering buying a franchise.

1. We Dramatically Reduced the Liquidated Damages Provision

Let’s start with one of the most dangerous provisions in many franchise agreements: liquidated damages.

Most prospective franchisees understandably focus on how much money they can make operating their franchise. Far fewer spend enough time considering how much money they could owe if the business fails.

That’s a mistake.

Many franchise agreements contain provisions requiring franchisees to pay substantial damages if the agreement is terminated before the end of its term. These damages are often calculated using a formula based on historical royalties projected over a period of future years.

Think about what that means.

You invest your savings into a franchise. You work hard. You follow the system. But despite your best efforts, the business doesn’t generate enough revenue to survive.

You close the doors.

And then you discover that the franchisor contends you owe hundreds of thousands of dollars in future royalties for a business that no longer exists.

To make matters worse, many franchise agreements require the owners to personally guarantee these obligations.

The business may be gone, but the debt can follow the franchisee home.

In this particular negotiation, we were able to obtain language that dramatically reduced the potential liquidated damages obligation. Just as importantly, the revised language provided substantially greater certainty about what our client could owe if the franchise relationship ended prematurely.

That certainty matters.

A prospective franchisee needs to understand not only the cost of getting into a franchise but also the potential cost of getting out. I have long believed that the financial consequences of a failed franchise should be one of the most important subjects in franchise agreement negotiations.

This negotiation reinforced that belief.

2. We Obtained Express Recognition of Iowa Franchise Law

The second concession was particularly important because our client will operate in Iowa.

Iowa has a franchise statute, Iowa Code Section 537A.10, that provides certain protections to qualifying franchisees. Depending on the circumstances, those protections can address important issues involving termination, nonrenewal, transfers, and other aspects of the franchise relationship.

But here is something many prospective franchisees overlook.

Franchise agreements frequently contain provisions selecting the law of another state to govern the agreement. The franchisor may be headquartered elsewhere and use that state’s law in agreements throughout the country.

That can create disputes about which law applies and what protections are available to the franchisee.

Iowa Code Section 537A.10 contains protections against contractual waivers of statutory rights, but the applicability of the statute may be contested by franchisors.

In our negotiation, we obtained language expressly acknowledging the applicability of the Iowa franchise statute.

Why is that important?

Because it provides additional contractual clarity regarding the protections available to our client and reduces the opportunity for a future dispute over whether the franchisor intended to recognize those protections. It is one thing to believe a statute protects your client. It is another to have the franchisor expressly acknowledge its applicability in the franchise agreement.

When you can eliminate an important area of uncertainty before a dispute arises, that is a meaningful negotiating victory.

3. We Negotiated Greater Certainty Regarding Required Product Deliveries

The third concession involved an issue that deserves far more attention, particularly when dealing with a newer franchise system.

Product availability.

Franchisees are frequently required to purchase certain products, equipment, inventory, or supplies from the franchisor or its designated suppliers.

Those purchasing requirements may be important to maintaining brand consistency and quality. But they can also create serious problems if the franchisor cannot deliver what the franchisee needs.

Imagine opening a business that depends on products supplied by the franchisor.

You sign a lease, hire employees, purchase equipment, and invest substantial money preparing to open. Your ability to operate depends on receiving required products on time.

But what happens if the products are delayed? What happens if the franchisor experiences supply chain problems? What if a newer franchisor has not yet developed the infrastructure necessary to support a growing franchise system?

The franchisee may still have rent, payroll, loan payments, and other obligations even when the products necessary to generate revenue are unavailable.

This concern becomes especially significant with a newer, relatively untested franchisor.

In our client’s case, we negotiated additional conditions concerning the delivery of required product purchases. Those provisions provide greater certainty regarding an important operational dependency.

That may not sound as exciting as reducing liquidated damages, but it could prove just as valuable.

After all, a franchisee cannot succeed simply because the franchise agreement gives the franchisor the right to require purchases. The franchisor and its supply system must be capable of supporting the franchisee’s operations.

If a franchisor requires you to purchase its products, it is reasonable to ask what commitments the franchisor will make concerning delivery.

Why Did the Franchisor Change Its Position?

That’s the interesting part of this case study.

We were initially told the franchisor would not negotiate.

Yet we ultimately received significant concessions in three areas that mattered a great deal to our client.

I cannot tell you precisely why the franchisor changed its position. Perhaps it recognized that our requests were reasonable. Perhaps it valued bringing a qualified franchisee into the system. Perhaps the initial refusal was simply a standard negotiating position.

Whatever the reason, the initial answer was not the final answer.

And that is the lesson.

I have reviewed franchise agreements for many years. Some franchisors are genuinely unwilling to negotiate certain provisions. Others have considerably more flexibility than their initial response suggests.

The challenge is knowing what to ask for, why it matters, and how to make the request.

I don’t recommend approaching franchise negotiations with a lengthy list of demands simply to see what you can get. That can be counterproductive.

Instead, identify the provisions that present the greatest financial and operational risks. Explain the concern. Propose a reasonable solution.

For this client, the priorities were clear. We wanted to limit the potential financial consequences of a failed business, clarify the applicability of Iowa franchise protections, and reduce uncertainty concerning required product deliveries.

Those requests were tied directly to legitimate business risks.

And we obtained meaningful results.

A Good Franchise Negotiation Is Not About Winning Every Point

One of the things I emphasize to prospective franchisees is that a successful negotiation does not require changing every provision in the agreement.

Franchisors have legitimate interests to protect. They need to maintain brand standards, preserve system consistency, and ensure that franchisees meet their obligations.

But franchisees have legitimate interests, too.

They are often investing substantial personal savings, borrowing money, signing long-term leases, and personally guaranteeing significant obligations.

There should be room for reasonable discussions about how those risks are allocated.

Sometimes the most important concession is not a lower fee or an additional benefit. It is a provision that prevents a difficult business situation from becoming a financial catastrophe.

That is what made this particular negotiation so satisfying.

We didn’t simply improve the wording of the agreement. We improved our client’s risk position before the client made a substantial investment.

The Bottom Line: Don’t Accept “We Don’t Negotiate” as the Final Answer

This week’s experience was a powerful reminder of something I’ve been telling franchisees for years.

Ask. Explain. Negotiate. And don’t assume the first answer is the final answer.

Will every franchisor agree to changes? Absolutely not.

Will every negotiation produce results like the one we achieved this past week? Of course not.

But think about what might have happened if our client had simply accepted the initial refusal.

The client would have entered the relationship with substantially greater potential liquidated damages exposure, less contractual clarity concerning Iowa franchise law, and fewer protections regarding required product deliveries.

Instead, the client will have a significantly improved agreement in those important areas.

We cannot guarantee that the franchise will succeed. No attorney can do that.

But we can help prospective franchisees better understand the risks they are assuming and, when possible, negotiate terms that reduce those risks.

And sometimes, as we learned this past week, the results can be remarkable.

My advice to prospective franchisees remains the same: Don’t be afraid to negotiate. The answer might surprise you.

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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Your franchise’s sales are growing. Your profits are not. When you examine the numbers, required purchases keep coming up: packaging, equipment, software, and other products or services you must buy to operate the business.

You find another supplier offering what appears to be the same quality at a lower price. But your franchise agreement says you must purchase from the franchisor or its designated suppliers. Does that end the discussion?

For a franchise covered by Iowa Code § 537A.10, the answer deserves a closer look. Iowa’s franchise law addresses purchasing restrictions, and that provision can matter to the money an owner actually keeps.

The Purchasing Provision Iowa Franchisees Should Know

Iowa Code § 537A.10(9)(a) generally prohibits a franchisor from requiring exclusive purchases from itself or specifically designated sources when goods or services of comparable quality are available elsewhere.

The provision has meaningful limits. Under subsection 9(b), approved supplier lists, product specifications, and reasonable supplier disapproval remain permissible. The subsection also excludes principal products manufactured by the franchisor and items protected as trade secrets.

Those distinctions matter. A cheaper quote starts an inquiry. It does not finish it.

Start With What You Are Actually Buying

Imagine an Iowa franchise owner who discovers that a local vendor sells products for substantially less than the required supplier. The owner believes the products perform the same function and meet the same standards.

That situation raises several questions. Are the products actually comparable? Do they satisfy the system’s specifications? Has the franchisor explained why the alternative is unacceptable? Is the restriction based on legitimate quality concerns, or is the owner simply being told that purchases must go through a particular source?

A useful comparison goes beyond price. It examines performance, consistency, warranties, delivery reliability, safety, and the documentation supporting each product. If the alternative fails an important standard, the anticipated savings may disappear quickly.

The goal is to build a documented request the franchisor can evaluate and counsel can assess.

A Purchasing Dispute Is Also a Profitability Issue

Owners often spend considerable time studying the initial franchise fee and royalty rate. They should give comparable attention to the purchasing obligations that continue throughout the relationship.

Consider a hypothetical business with $1 million in annual revenue and $80,000 in profit. If the owner could reduce annual purchasing costs by $15,000 without changing quality or operations, that savings would increase profit by nearly 19 percent.

For that owner, purchasing terms deserve serious attention.

During due diligence, ask which purchases are restricted, how alternative suppliers are evaluated, and what current franchisees experience when requesting approval. Ask about shipping charges, minimum orders, equipment replacement costs, and required technology subscriptions. A purchase price that looks competitive can become expensive after the other charges are included.

Do Not Switch Suppliers First and Investigate Later

Finding a less expensive supplier can be frustrating when the Franchisor appears to prevent using it. Acting before reviewing the legal and contractual requirements can make the situation harder to resolve.

A more productive approach is to review the agreement, purchasing policies, current invoices, and the alternative supplier’s specifications. Submit a written request through the appropriate approval process and ask for a written explanation if the request is denied.

That record helps identify the actual disagreement. It also creates an opportunity to resolve the issue before it becomes a default notice or lawsuit.

Does Iowa’s Law Apply to Your Franchise?

Section 537A.10 generally covers qualifying franchises operated in Iowa under agreements entered into on or after July 1, 2000. Definitions, location requirements, and exclusions affect coverage. An Iowa governing-law clause alone does not establish applicability.

That coverage analysis should come early. Franchisees should seek advice from a franchise lawyer early to determine if the Iowa protections apply.

For covered relationships, the statute also voids provisions that waive its protections or substitute another state’s law in place of the section. It provides a private civil remedy for violations, including but not limited to, attorneys’ fees. This matters because most franchise agreements designate another state’s law as governing, but that designation does not override the protections Iowa Code § 537A.10 provides to covered Iowa franchises.

The practical point is straightforward: reading the agreement is essential, but it may not tell you everything about your rights.

Ask About Purchasing Before You Buy the Franchise

A prospective franchisee should understand how the system controls purchasing before committing to years of operating expenses. An existing owner should periodically examine whether required purchases are affecting margins and whether a documented alternative deserves consideration.

The conversation can begin with a simple request: Here is the alternative product. Here are its specifications. Here is the cost difference. Please explain what it would take to obtain approval.

A franchise’s financial success depends on what remains after the bills are paid. Required purchasing deserves a place in that analysis, and Iowa Code § 537A.10 may give franchisees an important reason to ask better questions.

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Placing red push pins into city street map.
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Imagine spending months evaluating a franchise. You study the numbers, visit locations and find a market you believe is underserved. During a sales call, the representative pulls up a map. A shaded area surrounds your proposed location.

“This will be your protected territory.”

That sounds reassuring. You picture building a business without another franchisee from the same system moving in next door. But before you attach too much value to that shaded area, ask a more useful question: Protected from what?

A territory can offer meaningful protection. It can also leave room for competition you never considered when you built your financial projections.

The map is only the beginning

Start with Item 12 of the Franchise Disclosure Document, then read the territory provisions in the franchise agreement and any related exhibits or addenda. The FTC explains that an exclusive or protected territory may restrict competing outlets without protecting you from every form of competition from the franchisor. Depending on the arrangement, the franchisor may retain rights to sell through websites, retailers or other brands.

The practical question is what the documents actually prohibit. Does the protection apply to another franchised location? A company-owned location? An affiliate operating under a different name? Does it restrict where a competitor can open, where it can solicit customers, or both?

Those distinctions matter. A restriction on opening a storefront inside your territory does not necessarily reserve every customer in that territory for your business.

Follow the customer, not just the storefront

Consider a hypothetical service franchise with an exclusive territory. You hire employees and spend money developing local demand. A large employer inside your territory then purchases services through a national account arrangement controlled by the franchisor.

Who performs the work? Who receives the revenue? Are you entitled to participate, required to participate, or excluded altogether? If you perform the work, can you make money at the negotiated rate?

The account might be an excellent opportunity. It might also expose a gap between the market you thought you were buying and the rights you actually received.

Online sales raise similar questions. If your local advertising sends a customer to the brand’s website, where does that order go? Does your location receive the sale, a referral payment or nothing? Can those allocation rules change?

A map will not answer those questions. The relevant agreements and program rules need to.

Read what the franchisor reserves

Territory language should be read alongside provisions describing the rights the franchisor keeps. Depending on the agreement, those reservations may address online sales, national accounts, alternative brands or special locations such as airports, hospitals and college campuses.

Each exception deserves a business question: Could this affect the customers or revenue I am counting on?

A hospital exception may have little significance in one market and considerable significance in another. A national account reservation may matter much more to a commercial service business than to a neighborhood restaurant. Evaluate the exceptions against your actual business plan.

Also examine whether protection depends on minimum sales, development deadlines or other performance requirements. If you miss a requirement, can the territory shrink? Can exclusivity disappear? What notice and opportunity to cure does the agreement provide?

Protection that can change when sales decline belongs in your downside analysis.

Ask questions that produce usable answers

Before signing, get clear answers to these questions:

  • How are the territory’s boundaries defined, and are they attached to the agreement?
  • Which competing activities are prohibited, and which are expressly permitted?
  • Can nearby franchisees advertise to or serve customers inside the territory?
  • How are online orders, leads and national accounts allocated and compensated?
  • What could cause the territory or its protection to change?
  • If you sell or renew, will the same territory protection continue?

Then speak with existing franchisees in comparable markets. Ask whether nearby openings, online channels or account allocation have affected their businesses. Their experience can help you understand how the written rules operate in practice.

If an answer materially changes your assessment of the investment, ask for it to be reflected in the appropriate signed document. A reassuring conversation is a poor substitute for a clearly stated contractual right.

Put the territory into your financial model

The legal review and the financial review should inform each other. If your projections assume access to every customer within the shaded area, but the agreement reserves important sales channels to the franchisor, revisit those projections.

Some exceptions may be reasonable. Some may create additional business for you. Others may warrant a request for clearer boundaries, participation rights, compensation or limits on changes. The point is to understand their significance before you commit your money.

When someone tells you the territory is protected, ask them to show you exactly how. You are investing in the right to operate a business, and the value of that right depends on what the agreement allows everyone else to do around you.

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Rent
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You found the location. The traffic looks promising. The franchisor reviewed the site and gave its approval. Now the landlord wants a signature so construction can begin.

This is the point where many prospective franchisees breathe a sigh of relief. It is also the point where the real decisions begin.

A franchisor’s site approval and a franchisee’s decision to sign a lease answer different questions. The franchisor may be deciding whether the location fits its brand standards. You need to decide whether the business can afford the space, whether the lease gives you enough time to open, and what happens if you sell or the franchise fails.

Those answers are in the lease negotiations with the landlord.

The rent is only the beginning

A prospective franchisee may budget for base rent and still underestimate the cost of occupying the space. Taxes, insurance, maintenance charges, utilities, signage, HVAC repairs and required improvements can change the economics considerably.

Then there is the opening schedule. Rent may start before permits arrive, construction is finished or the franchisor authorizes opening. Every month you pay for an unopened location draws down the cash you expected to use to run the business.

Before signing, put the lease costs beside your startup budget and projections. Ask what happens if opening takes three months longer than planned. If that scenario puts the business in trouble before its first customer arrives, you need to know now.

Your two agreements need to work together

The franchise agreement and lease usually come from different parties, for different purposes. Neither party is necessarily checking whether the agreements fit together for your benefit.

Suppose the franchise term ends before the lease does. Suppose the franchisor requires a remodel, but the lease limits alterations. Or suppose the franchise ends and the lease still requires years of rent. Depending on the documents, closing the business may end your right to use the brand without ending your duty to pay the landlord.

These are problems to address before you sign. Compare the term and renewal provisions, opening deadlines, permitted use, signage rights, assignment rules and default provisions in both agreements.

Think about your exit while you still have choices

Nobody buys a franchise expecting to close it. But a sensible lease accounts for the possibility that you may need to sell the business, transfer the franchise or leave the location.

Can a qualified buyer take over the lease? Does the landlord have broad discretion to reject a transfer? If you sell, are you released from future obligations, or do you remain liable if the buyer later defaults? What does any personal guaranty cover?

An exit that works under the franchise agreement may fail if the lease blocks the transfer or leaves you responsible for years of rent.

Ask one simple question

Before signing, ask: If this location does not perform as expected, what will I still owe, and for how long?

The answer should include the franchise agreement, lease, loans, equipment contracts and any personal guaranties. It should also account for the cost of getting the location open in the first place.

A franchisor’s approval may be an important step in choosing a site. It is not a substitute for deciding whether the lease works for your business. Once you sign, the landlord will look to the lease for payment, no matter how confident everyone felt about the location on opening day.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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You form an LLC to buy a franchise. The LLC signs the franchise agreement, enters into a lease, borrows money, hires employees, and operates the business. You reasonably expect the LLC to provide a measure of protection between the business and your personal assets.

Then the documents arrive, and the liability picture becomes more complicated. The franchisor wants a personal guaranty. The landlord wants one too. If you are borrowing money, the lender may require another. An equipment company or major supplier may also ask for your signature.

This does not necessarily mean you should walk away from the opportunity. Personal guaranties are common in franchising and in other closely held businesses. But if you intend to buy a franchise, you should be prepared for the possibility that forming an LLC will not prevent you from becoming personally responsible for some of the business’s most significant obligations.

The important questions are not simply whether you will be asked to sign a guaranty. You need to understand what you are guaranteeing, how long the guaranty lasts, and what could happen if the business does not succeed.

What Does a Personal Guaranty Mean?

A personal guaranty is a promise that you will be responsible for obligations owed by the franchisee if the franchisee does not satisfy them. Although your LLC may be the party signing the underlying agreement, the guaranty gives the other party a potential claim against you individually.

The scope of that promise depends on the language of the particular guaranty. It may cover only certain payment obligations, or it may cover virtually every obligation imposed on the franchisee. It may include unpaid royalties, advertising contributions, technology fees, interest, indemnification obligations, attorneys’ fees, enforcement expenses, and damages claimed after termination.

This is why a buyer should never treat the guaranty as a routine signature page. The details matter.

The Franchise Agreement May Be Only the Beginning

Franchise buyers sometimes focus on the guaranty attached to the franchise agreement while overlooking their total personal exposure. A typical franchise transaction involves several agreements, and each may carry its own guaranty.

The commercial lease is often the largest additional exposure. A ten-year lease can represent hundreds of thousands of dollars in future rent. If the franchise closes, the landlord may have remedies against the tenant under the lease and may also pursue the individual guarantor, subject to the lease terms and applicable law.

A lender may require a guaranty for acquisition financing, startup capital, or a line of credit. Equipment leases, vendor arrangements, and other financing documents may contain additional personal obligations.

The real question is therefore not, “Am I guaranteeing the franchise agreement?” It is, “What is the total amount of personal exposure I am accepting across the entire transaction?”

That question should be answered before the agreements are signed.

Why Is a Guaranty Required if You Formed an LLC?

An LLC remains valuable. It may help separate business liabilities from personal liabilities and can provide important legal, tax, and operational benefits. But the existence of an LLC does not prevent its owner from voluntarily assuming a personal contractual obligation.

From the other party’s perspective, a newly formed franchisee entity usually has limited assets, little operating history, and no independent ability to satisfy a substantial judgment. The franchisor, landlord, or lender may view a personal guaranty as necessary protection before agreeing to do business with that entity.

In other words, the LLC and the personal guaranty are not inconsistent. The LLC is the operating entity. The guaranty is a separate promise by its owner.

Not All Guaranties Are the Same

Before signing, determine exactly what the guaranty covers. Important questions may include:

  1. Does the guaranty cover payment obligations only, or every obligation under the agreement?
  2. Does it include future damages or amounts claimed after the agreement is terminated?
  3. Does it cover attorneys’ fees and enforcement costs?
  4. Is liability capped at a specific amount?
  5. Does the guaranty expire or decrease after the franchise has operated successfully for a stated period?
  6. If there are several owners, is each owner responsible for the entire obligation or only a proportional share?
  7. Will the guarantor be released following an approved sale or transfer?
  8. Does the guaranty continue through renewals, extensions, amendments, or replacement agreements?
  9. Is a spouse expected to sign?
  10. What events would actually trigger personal liability?

The answers may be different for the franchise agreement, lease, and loan documents. Each guaranty needs to be reviewed on its own terms and as part of the transaction as a whole.

Can You Negotiate a Personal Guaranty?

Sometimes. Much depends on the franchisor, landlord, lender, strength of the franchise concept, location, owner experience, capitalization, and negotiating leverage.

A franchisor may insist that its form of guaranty is nonnegotiable. A landlord may be more willing to negotiate if the tenant has strong financials, the location is difficult to lease, or the guarantor is investing substantial capital in improvements. A buyer should not assume a change will be granted, but it can still be worthwhile to ask whether the risk can be narrowed.

Possible approaches include a dollar cap, a guaranty limited to certain obligations, a reduction after a period of timely performance, a fixed expiration date, a release following an approved transfer, or a limit on the number of months of rent covered by a lease guaranty.

Even when the answer is no, asking the right questions serves an important purpose. It tells the buyer what risk must be accepted to complete the transaction.

Be Prepared Before You Buy

A personal guaranty is not automatically a reason to reject a franchise. It is a reason to evaluate the investment more carefully.

Before signing, a prospective franchisee should calculate the potential exposure under all guaranteed agreements, consider how those obligations would be handled if the business underperforms, and determine whether personal assets should be exposed to that risk. The buyer should also evaluate insurance, capitalization, ownership structure, exit planning, and the financial consequences of a worst-case scenario with experienced legal and financial advisors.

No one buys a franchise expecting it to fail. But the time to understand a personal guaranty is not after the location closes and demand letters arrive. If you intend to buy a franchise, expect that personal guaranties may be part of the transaction. Read them carefully. Consider them collectively. Negotiate where you can. Most importantly, make sure the risk you are accepting is one you can understand and afford.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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If an experienced franchisee operating hundreds of restaurants can run into serious financial trouble, what should that tell someone preparing to buy a single franchise?

It should tell them that brand recognition is not the same as profitability.

Meritage Hospitality Group, one of Wendy’s largest franchisees, recently filed for Chapter 11 bankruptcy protection. According to CNBC, Meritage operates more than 300 Wendy’s restaurants. The company reportedly attributed its financial problems to pressures that included declining sales, increased discounting and higher costs.

The bankruptcy does not necessarily mean that Wendy’s is a bad franchise or that every Wendy’s franchisee is struggling. Chapter 11 is designed to permit a business to continue operating while it restructures its obligations. Meritage’s financial circumstances are also its own.

But the filing offers an important lesson for every prospective franchisee: even a nationally recognized franchise system can produce disappointing financial results for its operators.

The Brand Can Be Successful While the Franchisee Struggles

Prospective franchisees are naturally attracted to familiar names. A well-known brand may have national advertising, a recognizable logo, established products and thousands of locations.

Those things have value. They do not guarantee a profitable franchise.

The interests of a franchisor and its franchisees overlap, but they are not identical. A franchisor commonly receives royalties based on gross sales. The franchisee must pay those royalties and then cover labor, rent, food or product costs, insurance, debt service, required technology, advertising contributions and other operating expenses.

A location can generate impressive sales and still produce little or no profit for its owner.

The franchisor may point to systemwide sales growth, new store openings or increased market share. Those numbers may demonstrate brand strength, but they do not necessarily show whether the average franchisee is earning a reasonable return on the capital invested.

A prospective franchisee needs to ask a different question:

After paying every expense required to operate the business, how much money is actually left for the franchisee?

That is the number that matters.

Gross Revenue Is Not Profit

Item 19 of the Franchise Disclosure Document is the section in which a franchisor may provide financial performance information. When prepared properly, Item 19 can be one of the most useful portions of the FDD.

It can also be misunderstood.

An Item 19 disclosure may report average or median gross sales without disclosing net income. It may include mature locations but exclude newer or underperforming locations. It may combine company-owned and franchised outlets. It may present information from only a subset of the system.

The FTC Franchise Rule requires a franchisor making a financial performance representation to explain the basis for it, including how many outlets were included, the characteristics of those outlets and how many achieved or exceeded the reported result. The Rule also recognizes that an individual franchisee’s results may differ.

A prospective franchisee should look beyond the headline number and determine:

  1. Does Item 19 disclose gross revenue, profit or both?
  2. What expenses are excluded?
  3. Are royalties and advertising fees included in the expense calculations?
  4. Does the information include all qualifying locations or only selected locations?
  5. How old are the locations used in the calculation?
  6. How many locations actually achieved the stated average?

An average can be technically accurate while creating an overly optimistic impression. A few highly successful locations may pull the average upward. The median is often more informative, but even a median does not tell the buyer how much debt the operators carry or how much capital they invested to achieve those results.

Discounting Can Increase Sales While Reducing Profitability

Franchise systems often use discounts and value promotions to increase customer traffic. Those promotions may be good for the brand, but the financial consequences usually fall heavily on franchisees.

A discount can increase total transactions while reducing the profit earned on each transaction. If the franchisee must also absorb rising wages, rent, insurance and product costs, additional sales may not produce additional profit.

This is one reason prospective franchisees should not evaluate a system solely by its sales trend. They should understand who bears the cost of discounts, loyalty programs, coupons and national promotions.

Before investing, a buyer should ask existing franchisees:

  • Are franchisees required to participate in discount programs?
  • Does the franchisor subsidize any part of those promotions?
  • Have customer counts increased or decreased?
  • Have average tickets increased because of real demand or merely because of price increases?
  • Have store-level profit margins improved or declined?
  • Can a franchisee opt out of an unprofitable promotion?

A promotional strategy that drives customers through the door may still be harmful if every transaction produces an inadequate margin.

A Franchisee Bankruptcy May Not Appear in the FDD

Here is something many prospective franchisees do not realize: the FDD does not contain a general requirement that every bankruptcy filed by a franchisee be specifically disclosed.

Item 4 requires disclosure of certain bankruptcies involving the franchisor, its parent, certain predecessors and affiliates, its officers and other individuals with management responsibility relating to the sale or operation of the franchises. It does not require disclosure of an independent franchisee’s bankruptcy simply because that franchisee operates within the system.

That does not mean the effects of a bankruptcy will always remain invisible.

Item 20 provides information concerning changes in the franchise system during the franchisor’s last three fiscal years. It includes transfers, terminations, nonrenewals, outlets reacquired by the franchisor and outlets that ceased operating for other reasons. It also provides contact information for certain current and former franchisees.

If a bankruptcy leads to closures, terminations, transfers or reacquisitions, those outcomes may eventually appear in Item 20. But Item 20 generally reports the event affecting the outlet, not necessarily the franchisee’s bankruptcy or the financial reasons behind it. If the franchisee remains in business and its locations continue operating during a Chapter 11 reorganization, the filing itself may not be apparent from the FDD at all.

This is a significant limitation. A large franchisee’s financial distress can provide important information about the economics of the system, yet a prospective buyer may never learn about it by reading the FDD alone.

Item 20 Is the Beginning of the Investigation

The tables in Item 20 should be studied carefully, particularly when they show significant numbers of transfers, terminations, nonrenewals or outlets that ceased operations for other reasons.

But the tables cannot explain the entire story.

A transfer might represent a highly successful franchisee selling at a substantial profit. It might also represent an operator who could no longer afford to continue. A closure could result from poor management, a bad location, excessive debt, weak unit economics or problems throughout the franchise system.

The numbers identify where questions should be asked. They do not provide all the answers.

The most valuable part of Item 20 may be the franchisee contact information. Prospective franchisees should contact a meaningful cross-section of operators, including successful franchisees, struggling franchisees, newer operators, multi-unit owners and former franchisees.

Do not ask only, “Do you like the franchise?”

Ask questions that produce objective information:

  • What were your actual startup costs?
  • How long did it take to reach break-even?
  • Are your margins improving or declining?
  • What expenses surprised you?
  • How much working capital did you need?
  • Have required discounts affected profitability?
  • Have the franchisor’s decisions improved franchisee economics?
  • If you knew then what you know now, would you make the same investment?

Former franchisees may be especially important. They can explain why they left, what they received when they sold and whether the business produced an acceptable return.

Look Beyond the Logo

A famous brand can attract customers. It can provide systems, training and purchasing power that an independent business may not have.

But the brand does not pay the franchisee’s bills.

The lesson from any major franchisee bankruptcy is not that prospective owners should avoid franchising or assume the entire system is in trouble. The lesson is that buyers must investigate the economics of the business rather than relying on the strength of the name.

Review Item 19 carefully. Study the trends in Item 20. Speak with current and former franchisees. Investigate large operators. Build a conservative financial model. Determine whether the business can survive a difficult year.

A well-known franchise may be a good investment. But the logo above the door is only the beginning of the analysis.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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Beku Kanomi, Unsplash

“We have never enforced that provision.”

It sounds reassuring. A prospective franchisee raises a concern about harsh language in the franchise agreement, and the franchisor responds that the provision has never been used. Perhaps the salesperson adds that the language is merely standard, the franchisor would only use it in an extreme situation, or a good franchisee has nothing to worry about.

The natural reaction is to move on.

But if the franchisor does not intend to enforce the provision, why is it in the agreement? And if a dispute develops years later, which will matter more: the reassuring conversation or the contract the franchisee signed?

Those questions do not necessarily mean the franchisor is acting in bad faith. They do mean the prospective franchisee should slow down, document what was said, and understand the difference between an assurance and a contractual protection.

The Future Royalties Example

In a recent franchise agreement review, we represented a prospective multi unit franchisee whose agreement contained a significant future damages provision. If the agreement were terminated early, the provision could allow the franchisor to seek royalties it expected to receive during the remaining term.

We recommended eliminating the provision or substantially reducing the exposure, such as limiting any future royalty claim to no more than two years. The franchisor refused to revise the agreement. It did, however, state in an email that it had never enforced the provision.

As discussed in our prior article, The Franchisor Will Not Negotiate. Is a Franchise Agreement Legal Review Still Worth It?, the review remained valuable. The client understood the risk before signing, could evaluate it as part of the overall business decision, and obtained the franchisor’s position in writing.

But the email did not eliminate the provision. It did not cap the client’s exposure. It did not guarantee that the franchisor would never enforce the provision in the future.

That distinction is the central lesson.

An Assurance Is Not the Same as an Amendment

Businesspeople often place considerable weight on what was said during the sales process. That is understandable. Franchise sales representatives are building a relationship with the prospective franchisee. The conversations may feel direct, detailed, and sincere.

The franchise agreement, however, often tells a different story about which statements legally control.

Many franchise agreements contain an integration clause stating that the written agreement represents the parties’ entire agreement and replaces prior discussions, promises, and understandings. Most also contain nonreliance provisions in which the franchisee confirms that no outside statement or promise induced the decision to invest.

Those provisions can make it difficult for a franchisee to rely later on a verbal assurance. Even an email may not have the same legal effect as a formal amendment or signed addendum. Its significance will depend on the precise contract language, applicable law, the identity and authority of the person who made the statement, and the surrounding facts.

The practical hierarchy is straightforward:

  1. The strongest protection is to eliminate the objectionable provision through an enforceable addendum.
  2. The next best option is to revise or limit through an enforceable addendum.
  3. A formal side letter or written clarification signed by an authorized representative may provide meaningful protection, depending on its language.
  4. An email stating the franchisor’s position is better than an undocumented verbal assurance, but it may not override the agreement.
  5. A verbal statement alone provides the least protection and creates the greatest risk of misunderstanding or later disagreement.

The goal should always be to move as high on that list as the franchisor will permit.

The Writing Lesson: Make the Contract Say What the Parties Mean

There is a broader contract drafting lesson here. Clear legal writing should align the written agreement with the parties’ actual understanding.

If the franchisor says a provision applies only in an extreme circumstance, the agreement should define that circumstance. If the franchisor says damages will never exceed two years of royalties, the agreement should include that limitation. If the franchisor says it does not intend to enforce a particular right, the cleanest solution is to remove or narrow that right.

The more the explanation differs from the written language, the more uncertainty the franchisee assumes.

Lawyers sometimes describe contract provisions as boilerplate, but boilerplate can have real consequences. A provision does not become harmless merely because it appears in every agreement. The signed words remain available to the franchisor if the relationship deteriorates, management changes, or the brand is sold.

Good contract writing is not about making the document longer or more complicated. It is about reducing the distance between what the parties say they intend and what the document allows them to do.

When someone says, “That is not what this provision means,” the natural response is: “Then can we revise it to say what you mean?”

Why the Franchisor’s Current Practice May Not Predict the Future

A statement that the franchisor has never enforced a provision may be completely accurate. But it describes the past. The franchise agreement governs the future.

A franchise relationship may last ten or twenty years when renewal terms are included. During that time, circumstances can change considerably.

The franchisor may hire new executives or legal counsel. The founder may retire. The brand may be acquired by a larger company or private equity firm. Financial pressures may lead management to pursue claims that prior leadership chose not to pursue. A new strategy may place greater emphasis on strict contract enforcement.

The person who made the original assurance may no longer work for the company when the dispute arises.

This does not mean prospective franchisees should assume the worst. It means they should recognize that a contract right can outlast the people and practices that made it seem unimportant at the time of signing.

Get Important Statements in Writing

If the franchisor will not revise the agreement, ask it to confirm important representations in writing. The request can be respectful and direct:

“We understand that you have never enforced this provision and do not presently anticipate enforcing it except in extraordinary circumstances. Would you please confirm that understanding in writing and explain the circumstances in which you believe the provision would apply?”

The answer may be useful in several ways.

First, it reduces the chance that the parties are talking past one another. The franchisee may discover that the franchisor’s idea of an extraordinary circumstance is broader than expected.

Second, it creates a contemporaneous record. Memories fade, employees leave, and verbal conversations are easily disputed.

Third, the response may reveal whether the person making the assurance has authority to speak for the franchisor. A casual statement from a salesperson is not the same as a written position approved by the franchisor’s legal or executive team.

Fourth, the franchisor’s unwillingness to put the statement in writing is itself useful information. If the assurance is important enough to persuade the franchisee to sign but too uncertain to document, the franchisee should consider why.

Treat the Assurance as Information, Not Insurance

An email stating that a provision has never been enforced can still have value. It may provide context, preserve the franchisor’s stated interpretation, help resolve a later disagreement, or give the franchisee additional negotiating leverage.

But the franchisee should not treat it as insurance against the written contract.

The correct approach is to assign the statement its proper weight. It is one fact to consider alongside the actual language, the franchisor’s history, conversations with current and former franchisees, the strength of the business model, and the amount of capital at risk.

The franchisee must then decide whether the unresolved risk is acceptable.

The Best Time to Resolve Ambiguity Is Before Signing

Optimism is natural at the beginning of a franchise relationship. Both sides expect the business to succeed, and no one wants to dwell on termination, default, or damages.

But that is precisely why the agreement should be examined before the relationship begins. It is easier to discuss difficult provisions while both sides still want the transaction to move forward. After a default or termination, every sentence will be read through the lens of a live dispute.

When the franchisor says it has never enforced a provision, listen carefully. Ask follow up questions. Request a revision. Seek a reasonable limitation. Get the explanation in writing.

Most importantly, do not confuse the franchisor’s current practice with a binding promise about the future.

The signed agreement should say what the parties mean. When it does not, the franchisee should understand exactly what remains uncertain before investing.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

Review
Markus Winkler, Unsplash

“We do not negotiate our franchise agreement.”

Prospective franchisees hear that sentence all the time. It can make hiring a franchise attorney seem pointless. If the franchisor will not change the agreement, why pay a lawyer to review it?

Because changing the agreement is only one purpose of a franchise agreement review.

A thorough review can identify risks, clarify obligations, help you evaluate the economics of the opportunity, and create a written record of important representations. Even when the franchisor refuses every requested change, the review can help you make a deliberate business decision instead of discovering a serious problem after you have signed the agreement and invested substantial money.

A Real Example Involving Future Royalties

We recently represented a prospective multi unit franchisee whose agreement contained a significant future damages provision. If the franchise agreement were terminated before the end of its term, the provision could require the franchisee to pay royalties the franchisor expected to receive for the remaining years of the agreement.

This type of provision can create substantial exposure. Imagine a franchisee signs a ten year agreement, the business struggles, and the agreement is terminated after three years. Depending on the language, the franchisor could claim years of future royalties even though the franchisee is no longer operating the business or receiving any benefit from the franchise system.

We recommended that the provision be eliminated. If the franchisor would not eliminate it, we proposed substantially limiting it, such as capping future royalty damages at two years. That would not remove the risk, but it would make the potential exposure more predictable and manageable.

The franchisor refused to negotiate the provision.

That was not the result we wanted. But it did not make the review meaningless.

The client now understood the risk before signing. The client could consider that risk as part of the larger investment decision, including the strength of the brand, the required capital, the expected return, the development schedule, and the obligations associated with opening multiple locations.

The franchisor also stated in an email that it had never enforced the future damages provision. That statement was not as valuable as deleting or revising the provision in the agreement. The signed contract still contained the language, and franchise agreements commonly include integration and nonreliance provisions designed to make the written agreement controlling. Still, obtaining the statement in writing was better than relying on a verbal assurance that might later be forgotten, disputed, or attributed to a former salesperson.

If a future dispute ever arises, the email may provide useful context and potential leverage. Its precise legal significance would depend on the facts, the contract language, the applicable law, and the circumstances of the dispute. No franchisee should assume an email automatically overrides the agreement. But a contemporaneous written statement from the franchisor is more useful than an undocumented conversation.

Of course, everyone involved hopes the provision never comes into play.

A Franchise Review Serves More Than One Purpose

Negotiating better language is an important part of a franchise review, but it is not the only part. A good review should help a prospective franchisee answer at least four questions.

1. What are the most significant risks?

Franchise agreements contain dozens of obligations, but not every provision carries the same importance. An experienced franchise attorney should help distinguish routine requirements from terms that could materially affect the investment.

Those issues may include personal guaranties, future royalties, mandatory remodeling, transfer restrictions, territorial rights, termination standards, post termination noncompetition provisions, required purchases, dispute resolution procedures, and the franchisor’s ability to change system standards.

The goal is not to frighten the prospective franchisee with every unfavorable sentence. Most franchise agreements are written heavily in favor of the franchisor. The goal is to identify the provisions most likely to affect the franchisee’s money, operations, flexibility, and exit options.

2. What should we ask the franchisor to change?

Some franchisors negotiate more than others. The willingness to negotiate may depend on the maturity of the system, the number of units involved, the experience of the franchisee, the strength of the proposed territory, and the franchisor’s desire to complete the deal.

A prospective multi unit franchisee may have more leverage than someone purchasing a single location. But leverage should never be assumed. Even sophisticated franchisees and experienced operators are sometimes told that the agreement is nonnegotiable.

The franchisee should still make reasonable, focused requests. The franchisor’s response provides useful information. It shows which issues are truly fixed, where the franchisor has flexibility, and how the franchisor responds when a prospective franchisee raises a legitimate business concern.

3. What can we clarify or document?

Sometimes the most valuable result is not an amendment. It is a written clarification.

Suppose the franchisor says a broad contract provision is intended to address only an unusual situation. Ask the franchisor to explain that position in writing. If the franchisor says it has never enforced a provision, ask for written confirmation. If the franchise salesperson describes a particular territory, opening schedule, or operational accommodation, make sure the description matches the agreement or is otherwise properly documented.

Written clarification is not a substitute for revised contract language. It may not overcome an integration clause, and it may not bind future management. But it can expose inconsistencies before signing and create a record of what the franchisee was told during the sales process.

It can also force everyone to slow down and answer the same question: If this is truly how the franchisor intends to operate, why is it unwilling to state that clearly?

4. Is the remaining risk acceptable?

Legal review does not eliminate business risk. It helps the client decide whether the potential reward justifies the risk that remains.

That decision belongs to the client. One franchisee may accept a future royalties provision because the brand is strong, the unit economics are compelling, and the franchisee has confidence in the operating model. Another may conclude that the same provision creates too much downside exposure.

Neither decision is automatically right or wrong. The important point is that the decision should be informed.

“Standard” Does Not Mean Harmless

Franchisors frequently explain that a provision is standard or appears in every franchise agreement. That may be true. It does not answer whether the provision creates a material risk for this particular franchisee.

A personal guaranty may be standard, but it still places personal assets at risk. A remodeling requirement may be standard, but it can still require a major capital investment late in the term. A future royalties provision may be standard, but it can still increase the cost of a failed location or an early exit.

The right question is not simply whether the language is common. The right question is what the language could mean for the franchisee under realistic circumstances.

This is particularly important for a multi unit commitment. A risk that may be manageable for one location can become much larger when repeated across several franchise agreements or combined with a development agreement requiring additional locations to open on a fixed schedule.

The Review Can Also Reveal Something About the Relationship

The negotiation process provides an early look at how the franchisor communicates and handles reasonable concerns.

A franchisor has every right to protect consistency within its system. Uniform agreements can make system administration easier and help the franchisor avoid granting conflicting rights to different franchisees. A refusal to negotiate does not necessarily mean the franchisor will be a poor business partner.

But the manner in which the franchisor responds still matters. Does it explain its position? Does it answer questions directly? Does it provide meaningful information, or merely repeat that the agreement is standard? Is it willing to document assurances made during the sales process?

Those interactions may offer a preview of the relationship after the franchise fee has been paid and the agreement has been signed.

Informed Consent Is a Valuable Result

Prospective franchisees sometimes measure the value of a legal review by counting the number of contract changes obtained. That is too narrow a measure.

A successful review may result in negotiated protections. It may uncover a dealbreaker. It may confirm that the client understands and accepts the risks. It may also produce written clarification that could become important later.

In our client’s situation, the franchisor would not eliminate or limit the future royalties provision. The client did not receive the contractual protection we requested. But the client understood the potential exposure, considered it before moving forward, and obtained the franchisor’s written statement that the provision had never been enforced.

That is not a perfect outcome. It is still far better than learning about the provision for the first time in a termination notice or demand letter.

The purpose of a franchise agreement review is not simply to mark up a contract. It is to help the prospective franchisee understand the deal, improve it where possible, document important representations, and decide with open eyes whether to proceed.

Even when the franchisor says no, those protections still matter.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

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DESIGNECOLOGIST, Unsplash

This is the 1,000th published post on Rush on Business.

After 20 years of writing this blog, the number still feels a little hard to believe.

One thousand posts means thousands of hours spent thinking about the questions business owners ask, the problems that keep them awake, and the decisions that can change a company. It means early mornings, late evenings, a LOT of weekends, and ideas captured between through many client interactions.

Most of all, it represents 1,000 opportunities to make business law a little more understandable and, hopefully, a little more useful.

This milestone is worth celebrating. It is also a good time to explain why Rush on Business exists, whom I am trying to help, and where the blog is headed next.

Why I Started Writing

Business owners do not usually call a lawyer because everything is simple.

They call when they are about to invest their savings in a franchise. They call when a partner stops contributing but still expects to share in the value. They call when a major contract arrives with a short deadline and fifty pages of provisions that seem to favor everyone except them. They call when an employee leaves, a customer refuses to pay, a landlord takes a hard position, or a business relationship that once depended on trust begins to fall apart.

The legal question matters. But it is rarely the only question.

The owner also wants to know what the problem means for the business. How much risk is involved? What options are realistic? Is this a problem to fight over, negotiate, fix, or walk away from?

Those questions inspired me to provide insights and guidance to business people searching for answers.

The goal was never to create law review type articles or to write for lawyers. There are plenty of excellent legal blogs, treatises, case summaries, and technical resources for those working in law. The purpose of this blog is different. I want to explain legal and business issues in language an owner can understand and use.

The law should help people make better decisions. If an article identifies a statute but leaves the reader unsure what to do next, it has not finished the job.

Practical Insights. Stronger Businesses.

Practical means starting with the reader’s actual problem. It means recognizing that the legally perfect answer may be commercially unrealistic. A business owner must consider time, cost, relationships, reputation, leverage, and the likelihood of collecting even after winning.

Insights means going beyond the obvious. Anyone can say that a contract should be reviewed before it is signed. The more useful discussion identifies which provisions matter most, how those provisions affect the economics of the deal, and what questions the owner should ask before committing.

Stronger businesses are the ultimate goal. Sometimes strength means growth. Sometimes it means better contracts, healthier partnerships, stronger employment practices, or more disciplined decision-making. At other times, strength means recognizing that a bad deal should not be signed or that a damaging relationship needs to end.

Good legal advice is not measured by how complicated it sounds. It is measured by whether it helps the client see the situation more clearly and choose a better path.

Helping Prospective Franchisees Before They Fall in Love With the Brand

Franchise law has become an increasingly important part of this blog and my practice.

Prospective franchisees often arrive with understandable excitement. They have found a brand they admire. They can picture the location, the customers, and the future the business might create for their family. The franchisor has a polished presentation, an established system, and an answer for nearly every question.

Excitement is not the problem. Making a life-changing investment before testing the assumptions is the problem.

We help prospective franchisees understand what they are actually buying. That includes reviewing the Franchise Disclosure Document (FDD) and franchise agreement, but the work is broader than marking up a contract. We examine territory protection, fees, renewal rights, required vendors, personal guarantees, transfer restrictions, financial performance representations, and the franchisor’s authority to change the system after signing.

We encourage prospective owners to speak with current and former franchisees, build a conservative financial model, consult an accountant, and test whether the business remains profitable under less favorable assumptions.

The best time to identify a franchise problem is before the franchise fee is paid, the lease is signed, and the owner’s bargaining power changes.

One of the continuing goals of Rush on Business is to become the most useful franchise law resource available to prospective franchisees. Not the loudest. Not the most promotional. The most useful.

Standing With Existing Franchisees When the Relationship Changes

Franchise relationships can last for many years. During that time, the system may change dramatically.

A founder may sell the franchisor to private equity. Technology fees may increase. New vendors may become mandatory. A franchisor may approve another location nearby, require an expensive remodel, issue a default notice, or present a renewal agreement that looks nothing like the original deal.

Existing franchisees often feel the imbalance built into the relationship. They have invested in a location, employees, equipment, and local goodwill. The franchisor may have broad contractual discretion and greater financial resources. Walking away is rarely simple.

We represent franchisees confronting those issues. Sometimes the work involves negotiation and a practical business solution. Sometimes it involves a transfer, sale, termination, or negotiated exit. Sometimes the franchisor’s position must be challenged through mediation, arbitration, or litigation.

The blog will continue to address the moments when franchisees are most vulnerable: defaults, nonrenewals, encroachment, mandatory system changes, supplier restrictions, personal guarantees, liquidated damages, and disputes over what the franchisee was told before buying.

Franchisees need more than a summary of what the agreement says. They need help understanding their leverage, preserving their options, and deciding what a good outcome realistically looks like.

Serving Entrepreneurs, Closely Held Businesses and Athletes

Rush on Business has never been limited to franchising.

We serve entrepreneurs, established companies, family businesses, closely held companies, and athletes. Some clients are forming their first business. Others have operated for decades and are preparing for a major transaction, ownership transition, or difficult dispute.

The work may involve business formation, ownership agreements, contracts, employment matters, leases, purchases and sales, succession planning, collections, or litigation.

Many of the most challenging cases arise among business partners. The parties may have started as friends, relatives, or trusted colleagues. They focused on the opportunity and assumed they would work out any disagreement later. Then the business succeeds, struggles, or simply changes, and the missing provisions suddenly matter. Who controls the company? Who must contribute additional capital? How should an owner be compensated for work? Can an interest be transferred? What happens if someone stops participating? How is the business valued when an owner leaves?

These are legal questions, but also human ones. Money, identity, fairness, control, and years of shared history can become tangled together. The best approach identifies the interests beneath the positions and protects the client’s rights without creating unnecessary damage.

When resolution is possible, we work toward it. When litigation becomes necessary, we prepare the case with discipline and focus.

What Comes After 1,000?

The honest answer is 1,001.

A client who recently sold his agricultural business to private equity told me he planned to celebrate by stopping at Kwik Star and then heading right back into the field. I can relate. It is worth pausing to appreciate the milestone, but then it is time to get back to work.

There are more questions to answer and developments to examine. Private equity, artificial intelligence, new technology, expanding fees, and new ownership models are reshaping the relationship between franchisors and franchisees.

Business owners are also navigating higher costs, tighter margins, generational transitions, and increasingly complex contracts. They need guidance connecting legal rights with commercial reality.

Rush on Business will continue building deeper resources for prospective and existing franchisees, with particular attention to Iowa franchise law and the issues that arise throughout the life of a franchise. It will also continue addressing the contracts, negotiations, disputes, and ownership challenges faced by closely held businesses.

The ambition is admittedly large: build the best franchise law blog on the planet while remaining a trusted source of practical business law guidance.

That goal will not be achieved through slogans or search rankings alone. It will be achieved one useful article at a time.

A Note of Gratitude

No one writes 1,000 posts without readers and many individuals who have hired me as a result of this blog.

I am grateful to the clients who have trusted us with consequential decisions. Their questions have sharpened my thinking and revealed issues deserving wider discussion. I am grateful to the lawyers, accountants, consultants, and business advisers who have referred people to us. I am grateful to everyone who has read an article, sent it to a colleague, or said the blog helped them in some way.

After more than three decades of practicing law, I continue to learn from the businesses and people I represent. The documents matter, but so do judgment, communication, preparation, and relationships.

One thousand posts is a milestone. It is not a finish line.

The next chapter of Rush on Business will be more focused, practical, and ambitious. We will keep helping franchisees understand the deal before signing, protect the businesses they have built, and respond when the relationship changes. We will keep helping entrepreneurs and closely held businesses solve problems and pursue opportunities.

Most of all, we will keep trying to make each post worth the reader’s time.

Thank you for reading, whether this is your first visit or you have been here for years.

Here is to 1,000 posts, stronger businesses, and the work still ahead.

ABOUT THE AUTHOR

Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.

You may have spent ten years building your franchise. You found the location, signed the lease, hired employees, developed customers, and invested years of work in the business.

Then the expiration date approaches, and the franchisor tells you that it may not renew your agreement.

Can the franchisor simply take away the business you built when the contract ends?

For an Iowa franchisee, the answer may be no. Iowa law provides meaningful protections against nonrenewal. But those protections do not necessarily guarantee that the franchisee can continue under the same terms.

That distinction matters. Iowa law may protect your opportunity to renew. It does not necessarily preserve the bargain you originally made.

Renewal Is Not Always an Extension

Many franchisees assume renewal means adding another five or ten years to their existing franchise agreement. In practice, renewal often means something very different.

The original agreement may require the franchisee to sign the franchisor’s then-current form of franchise agreement. The new agreement may contain higher fees, different territory protections, additional technology obligations, stricter default provisions, broader personal guarantees, or new requirements that did not exist when the franchisee first invested.

The franchisee may also be required to remodel the location, replace equipment, complete new training, cure every outstanding default, and sign a general release of claims against the franchisor.

The result is not merely an extension. It may be a new financial and legal relationship involving the same business.

Iowa Law Restricts a Franchisor’s Ability to Refuse Renewal

The principal Iowa renewal protections appear in Iowa Code section 537A.10(8).

The statute generally provides that a franchisor cannot refuse to renew a franchise unless two requirements are satisfied.

First, the franchisor must notify the franchisee of its intent not to renew at least six months before the expiration date of the agreement or any extension of it.

Second, one of the following circumstances must exist:

  1. Good cause exists, and the refusal to renew is not arbitrary or capricious.
  2. The franchisor and franchisee agree not to renew.
  3. The franchisor completely withdraws from directly or indirectly distributing its products or services in the geographic market served by the franchisee.

If the franchisor relies on the market-withdrawal provision, the statute also addresses enforcement of the former franchisee’s covenant not to compete.

These protections are significant. In many states, a franchise agreement may simply expire according to its terms, subject primarily to the contract. Iowa law places substantive limits on a franchisor’s decision not to renew.

What Does “Good Cause” Mean?

Iowa law defines good cause for nonrenewal as cause based on a legitimate business reason. The statute also provides that the refusal cannot be arbitrary or capricious.

That standard provides protection, but it does not answer every factual question.

A franchisor may argue that good cause exists because the franchisee has failed to meet brand standards, maintain the premises, make required payments, complete a remodel, achieve required performance standards, or comply with other material obligations. A franchisee may respond that the asserted reason is minor, pretextual, inconsistently enforced, or unrelated to a legitimate need of the system.

The language of the agreement, the nature of the alleged problem, the franchisor’s communications, and its treatment of similarly situated franchisees may all become important.

A franchisee should not assume that every contractual violation gives the franchisor an automatic right not to renew. At the same time, the franchisee should not assume that years of operating history will overcome documented defaults or a legitimate business justification.

The facts need to be examined early, while there may still be time to cure problems, assemble the record, and negotiate a practical solution.

Six Months’ Notice Is Important, but It Is Not a Planning Period

The Iowa statute generally requires at least six months’ notice of an intent not to renew. That does not mean the franchisee should wait for the notice before addressing renewal.

Six months can disappear quickly when a franchisee must evaluate a new agreement, arrange financing, negotiate a lease extension, complete a remodel, address alleged defaults, or consider a sale. If a dispute arises over whether good cause exists, the franchisee may also need time to gather documents and obtain legal advice.

The better practice is to begin reviewing renewal 12 to 18 months before expiration.

That review should begin even earlier if the franchisee has a long-term lease, significant personal guarantees, or major capital improvements approaching. The franchise term and lease term should be coordinated whenever possible. A franchisee does not want to remain liable for years of rent without the right to operate the franchised business from the location.

The Catch: Iowa Law Allows New Terms and Fees

Iowa’s renewal protection contains an important limitation.

As a condition of renewal, the franchise agreement may require the franchisee to meet the franchisor’s then-current requirements and execute a new agreement incorporating the terms and fees then being offered to new franchisees.

This means the franchisor may be required to offer renewal but still have substantial power over the conditions attached to that renewal.

A franchisee who originally agreed to one royalty structure may face a higher rate or new categories of fees. The protected territory may become smaller or include more exceptions. Technology, marketing, training, insurance, purchasing, and reporting requirements may expand. The new agreement may provide the franchisor with broader discretion and the franchisee with fewer remedies.

The franchisee must therefore evaluate two separate questions:

  1. Can the franchisor legally refuse to renew the relationship?
  2. Are the terms being offered for renewal commercially acceptable?

Winning the first question does not necessarily solve the second.

Compare the Agreements, Not Just the Fee Page

When the franchisor provides the renewal agreement, compare it carefully with the current agreement. A summary from the franchisor or a review of the royalty provision alone is not enough.

Important changes may appear in provisions addressing:

  • Royalty and marketing fees
  • Technology charges and required platforms
  • Territory and alternative distribution channels
  • Required vendors and supplier rebates
  • Remodeling and capital improvements
  • Personal guarantees
  • Default and termination rights
  • Transfer restrictions and transfer fees
  • Post-term covenants not to compete
  • Dispute resolution, venue, and governing law
  • Liquidated damages
  • Renewal rights after the next term
  • The franchisor’s authority to modify the operating manual

A provision that appears technical may have substantial economic consequences. For example, a change allowing the franchisor to require additional technology without a cap may become more expensive over the renewal term than a modest royalty increase.

The right comparison is not between one fee in the old agreement and the same fee in the new agreement. It is between the complete legal and financial bargain under each document.

Watch Closely for a General Release

Many renewal packages require the franchisee to sign a general release in favor of the franchisor and related parties.

The release may cover known and unknown claims arising during the original term. If the franchisee has concerns about territorial encroachment, improper charges, supplier practices, marketing expenditures, disclosure issues, or the franchisor’s performance, signing the release may eliminate the ability to pursue those claims.

The franchisee should identify potential claims before signing the renewal documents. The fact that the owner wants to remain in the system does not mean every historic issue should automatically be released without analysis or negotiation.

The release can also create leverage for a practical resolution. The franchisor may value finality. The franchisee may be willing to provide an appropriately limited release in exchange for acceptable renewal terms, resolution of disputed charges, or other protections.

Remodeling Requirements Can Change the Renewal Decision

Renewal commonly requires the franchisee to bring the location into compliance with current brand standards. That may include new signage, décor, equipment, furniture, technology, or a substantial remodel.

These costs should be evaluated against the length and economics of the renewal term. A franchisee should determine:

  • The total expected cost
  • The required completion date
  • Whether the estimate includes business interruption
  • Whether financing is available
  • Whether the lease term supports the additional investment
  • Whether another remodel may be required during the renewal term
  • Whether the franchisor will provide any contribution or incentive
  • Whether the projected unit-level return justifies the expenditure

An owner who has operated for ten years should not assume that prior success makes another major investment financially sound. Renewal is a new investment decision and should be analyzed that way.

Renewal, Transfer, and Exit Should Be Evaluated Together

A franchisee approaching expiration may have more than one option.

Renewing can preserve the business and provide additional time to build value. Selling before renewal may allow the owner to transfer the location to a qualified buyer, although the buyer may still be required to sign the current franchise agreement and complete upgrades. An orderly exit may make sense if the new terms, required investment, or future profitability are not acceptable.

The timing of these options matters. A buyer may be reluctant to acquire a franchise with only a few months remaining on its term. The franchisor may have approval rights, transfer fees, remodeling requirements, and other conditions. The lease may also require landlord consent.

Waiting until the renewal deadline can reduce every available option.

What an Iowa Franchisee Should Do Before Expiration

If your Iowa franchise agreement will expire within the next 18 months, consider the following steps:

  1. Confirm the expiration date and every contractual renewal deadline.
  2. Confirm that Iowa Code section 537A.10 applies to the franchise relationship.
  3. Identify existing defaults, alleged defaults, and unresolved disputes.
  4. Request the proposed renewal agreement and current disclosure document early.
  5. Compare the complete renewal agreement with the current agreement.
  6. Calculate the cost of new fees, technology, equipment, and remodeling.
  7. Review any general release before signing it.
  8. Coordinate the renewal term with the lease and financing obligations.
  9. Evaluate renewal, transfer, sale, and exit alternatives together.
  10. Preserve communications concerning performance, defaults, system changes, and renewal.

Do Not Let the Expiration Date Make the Decision for You

The real renewal question is broader than whether the franchisor must let you stay.

You need to know what it will cost to stay, what rights you will give up, what obligations you will assume, and whether the renewed business is likely to provide an acceptable return on the additional investment.

After years of building the business, the natural instinct is to preserve it. Sometimes renewal is the right answer. Sometimes a sale, transfer, or planned exit is better. The worst outcome is allowing a deadline, an unexpected remodel, or a one-sided renewal package to make the decision for you.

Start early. Understand the Iowa protections. Compare the new bargain with the old one. Then decide whether another term serves your interests, not merely whether the franchisor is willing to offer it.

Rush Nigut is a franchise attorney based in West Des Moines, Iowa with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.