“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.

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.

You chose the brand. You studied its leadership. You spoke with its franchisees. You invested your savings, signed a long-term lease, and built a business around the system the founder described.

Then someone else bought the franchisor.

The franchise agreement may remain in place. The name on the building may not change. Customers may never know that anything happened. Inside the system, however, the priorities, decision-makers, and financial pressures can change quickly.

Private equity has become a major force in franchising. Well-known brands have attracted private investment because franchise systems can offer recurring royalty revenue, relatively low corporate capital requirements, and opportunities for expansion. For investors, those qualities can make a successful franchisor an appealing asset.

For franchisees, new capital and professional management can create real opportunities. It can also create a new question that deserves careful attention:

Is the new owner building a stronger franchise system, or merely extracting more value from the system that franchisees already built?

A Founder and a Private Equity Firm May Measure Success Differently

This is not a story in which every founder is benevolent and every private equity firm is harmful. Some founders make poor decisions, resist needed change, or operate without the capital and expertise necessary to compete. Some private equity owners improve technology, recruit experienced leadership, strengthen purchasing power, and help a good brand reach its potential.

The difference often begins with incentives.

A founder may view the franchise as a life’s work. The brand can carry the founder’s name, history, identity, and reputation. A founder may care deeply about profit, but also about the product, franchisee relationships, customer loyalty, and the condition in which the business will be left for the next generation.

A private equity firm usually acquires the franchisor as an investment. It has investors who expect a return, a financial model supporting the purchase price, and a plan for increasing the company’s value. The firm may expect to sell the business, recapitalize it, or take it public within a defined investment horizon.

That does not make the investor wrong. Profit is necessary in every healthy franchise system. But a hyper-focus on financial performance can produce decisions that improve the franchisor’s short-term numbers while placing additional pressure on franchisees.

The franchisor and its franchisees both earn money from the same customer transaction, but they do not always experience the economics in the same way. The franchisor generally receives royalties based on gross sales. The franchisee must pay rent, labor, inventory, debt, insurance, and other operating costs before determining whether any profit remains.

Growth in systemwide sales may therefore look successful at the franchisor level even when unit-level margins are deteriorating.

The Purchase Price Has to Be Justified

Private equity firms do not ordinarily buy a franchise system with the goal of leaving it unchanged. They acquire it because they see opportunities to increase its value.

Those opportunities may include opening more locations, selling more franchises, improving technology, reducing corporate expenses, increasing fees, changing suppliers, expanding internationally, or acquiring related brands. Some of those changes may strengthen the entire system. Others may transfer costs or risk to franchisees.

The pressure can become greater when the acquisition involves substantial debt. Debt can magnify returns when the investment performs well, but principal and interest obligations also create demands on the franchisor’s cash flow. A highly leveraged owner may have less patience for investments that produce long-term benefits but do not improve near-term financial results.

Franchisees should not assume that the amount paid for the franchisor has no relationship to them. The new owner must find value somewhere. In a franchise system, much of that value ultimately comes from franchisee sales, franchisee payments, new unit development, and the strength of the brand created through local operations.

Fees May Receive New Attention

One of the most direct ways to increase franchisor revenue is to collect more from the existing system.

The royalty rate may be fixed under current agreements, but other charges may provide greater flexibility. Franchisees may see changes involving:

• Technology fees
• Marketing contributions
• Training and conference expenses
• Renewal and transfer fees
• Required software or service platforms
• Vendor programs
• Administrative charges
• New products or operational programs

The operating manual can become especially important. Many franchise agreements permit the franchisor to revise system standards through the manual without formally amending the agreement. A new owner may use that authority to implement technology, vendor, equipment, or remodeling requirements that create substantial franchisee expense.

Franchisees should compare each new charge against the franchise agreement and disclosure document. They should ask what contractual provision authorizes the charge, whether the franchisor or an affiliate receives compensation from the program, and how the change is expected to improve unit-level performance.

The most useful question is not whether the program benefits the brand in some general sense. It is whether the projected benefit to the franchisee reasonably justifies the franchisee’s cost.

Rapid Growth Can Create Its Own Problems

Private equity owners often see expansion as a path to increased value. More locations can mean more initial franchise fees, more royalty revenue, more purchasing volume, and a larger platform for a future sale.

Disciplined growth can benefit everyone. Poorly managed growth can weaken the system.

The franchisor may lower its standards for approving new franchisees or locations. New units may be placed close to existing locations. Corporate resources may be directed toward selling franchises rather than supporting the owners already operating. Field support, training, site selection, and supply infrastructure may fail to keep pace with development.

The result can be a larger system with weaker unit economics.

Existing franchisees should monitor whether the franchisor is growing because consumer demand supports additional locations or because the new owner needs a particular development story. Those are not always the same thing.

Territory and encroachment provisions deserve renewed attention. A franchisee with a protected territory may have meaningful contractual rights. A franchisee with only a location and no express protection may have far less control over nearby development, alternative channels, delivery sales, or affiliated brands.

Cost Cutting Can Reach Franchisee Support

A new owner may identify corporate expenses that can be reduced without harming the system. That is good management.

The risk arises when support functions are viewed only as costs.

Experienced field representatives, training personnel, operations specialists, and long-serving executives may carry institutional knowledge that does not appear on a balance sheet. When those people leave, franchisees may lose relationships and practical assistance that influenced their original decision to join the brand.

Centralized call centers, automated systems, and fewer field visits may reduce the franchisor’s expenses while making it harder for franchisees to solve operational problems. A leaner corporate office can improve the franchisor’s margin, but it may leave franchisees paying the same royalties for less support.

Ask whether the system’s resources are increasing along with its demands. New reporting requirements, technology mandates, and operating standards should be accompanied by the training and support necessary to implement them.

Required Vendors Can Become Revenue Sources

Private equity ownership may bring sophisticated purchasing programs and better vendor negotiations. Scale can lower costs, improve consistency, and give franchisees access to products or technology they could not obtain independently.

It can also make the supply chain a source of additional franchisor revenue.

The franchisor or its affiliates may receive rebates, commissions, markups, or other benefits from approved suppliers. A new owner may consolidate vendors, introduce proprietary products, or require franchisees to use affiliated services. Even when these arrangements are properly disclosed and contractually permitted, franchisees should evaluate their effect on unit-level costs.

The relevant comparison is not simply whether the franchisor negotiated a discount. It is whether the franchisee receives competitive pricing after every rebate, commission, and markup is considered.

Enforcement May Become More Aggressive

Founder-led systems sometimes manage franchisee relationships informally. Longstanding owners may receive patience, direct access to leadership, or flexibility based on years of history.

A new owner may replace those practices with standardized enforcement. Defaults that were once handled through a conversation may produce formal notices. Renewal decisions may become more closely tied to compliance, remodeling, or execution of the franchisor’s current agreement. Transfer requests may be evaluated with greater attention to fees, releases, and required upgrades.

Consistent enforcement can be appropriate and may strengthen a brand. Selective enforcement, sudden changes in expectations, or the use of technical defaults to gain negotiating leverage creates a different concern.

Franchisees should document communications, respond promptly to default notices, and avoid relying on historic practices that are not reflected in the written agreement. A relationship that once operated on trust may now operate much more strictly by contract.

The Next Sale May Already Be Part of the Plan

When private equity acquires a franchisor, the acquisition is often one stage in a larger investment strategy. The owner may eventually sell to another private equity firm, recapitalize the company, combine it with other brands, or pursue a public offering.

Each transaction can introduce new leadership, additional debt, different performance targets, and another round of strategic changes. Franchisees, meanwhile, remain committed to their locations, employees, leases, and personal guarantees.

This difference in time horizon matters. The investor may have several ways to exit its investment. The franchisee often has one business, one local market, and a franchise agreement that may be difficult to transfer or terminate.

That imbalance is why unit-level profitability must remain central to every proposed system change. A franchisor can be sold at an impressive valuation while individual franchisees struggle to earn an acceptable return.

Private Equity Can Make a Good System Better

Private equity investment should not be treated as an automatic warning that the system will decline. A well-managed investment can provide:

• Capital for technology and product development
• Experienced executive leadership
• Improved data and financial discipline
• Greater purchasing power
• Better marketing capabilities
• Expansion into new markets
• Resources to acquire complementary brands
• A more professional approach to franchisee support

Founders sometimes preserve traditions that no longer serve the business. A disciplined investor may identify weak practices, improve accountability, and make changes that should have occurred years earlier.

The real issue is whether value is being created or merely transferred. Sustainable value comes from stronger stores, healthier franchisees, better products, and customers who return. Extracted value may improve the franchisor’s financial statements temporarily while weakening the operators responsible for delivering the brand.

What Franchisees Should Do After a Sale

A franchisee may not have the legal right to approve or prevent the sale of the franchisor. That does not mean the franchisee should remain passive.

After an ownership change, consider taking the following steps:

1. Review the franchise agreement. Identify provisions addressing assignment by the franchisor, fees, required vendors, technology, system standards, remodeling, territory, renewal, and default.
2. Preserve the existing record. Keep copies of the current operating manual, fee schedules, policies, correspondence, and representations concerning support or planned investments.
3. Request the new owner’s plan. Ask how the acquisition will affect leadership, franchisee support, development targets, technology, marketing, vendors, and required capital expenditures.
4. Track unit-level economics. Compare sales, costs, fees, and profit margins before and after major changes. General claims of system growth should not replace location-specific analysis.
5. Communicate with other franchisees. Franchisee associations and advisory councils can identify systemwide patterns and present concerns more effectively than isolated owners.
6. Evaluate each new requirement. Determine the contractual authority, financial cost, expected benefit, implementation period, and whether the franchisor receives related compensation.
7. Plan for renewal or exit early. Do not wait until the end of the term to evaluate new agreement terms, transfer options, required renovations, or potential claims.

Follow the Money, but Also Follow the Incentives

When a private equity firm buys a franchisor, franchisees should look beyond the announcement describing new capital, accelerated growth, and an exciting next chapter.

Ask how the new owner plans to earn its return.

Will it invest in the brand and improve unit-level profitability? Will it increase the number of locations faster than the market can support? Will it reduce corporate support, increase fees, monetize vendor relationships, or require expensive new programs? Will decisions be measured over the life of the franchise system or over the investor’s expected holding period?

The answers will not always be obvious on the closing date. They will appear over time in budgets, leadership changes, development goals, vendor programs, fee schedules, operating requirements, and the way the franchisor responds when franchisees raise concerns.

Private equity can bring valuable capital and discipline to a franchise system. It can also bring financial pressure that reaches franchisees who had no voice in the transaction.

The name on the building may remain the same. The bargain behind it may begin to change.

ABOUT THE AUTHOR

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.

The franchise fee gets your attention because it is usually the largest check you write on signing day. It may not be the fee that ultimately costs you the most.

I once worked with a franchisee who learned this lesson after the business was already operating. The franchise system had the usual collection of charges beyond the initial franchise fee, including royalties, marketing obligations, technology expenses, and other required costs. But the problem did not stop with the number of fees.

During the term of the franchise agreement, the franchisor attempted to increase certain fees multiple times.

Each increase may have appeared manageable when viewed by itself. Together, however, the increases changed the economics of the relationship. The franchisee had made the investment, signed the lease, hired employees, and built a business around one set of financial assumptions. The franchisor retained contractual flexibility to impose higher costs after the franchisee was committed and had far fewer practical options.

That experience illustrates one of the most overlooked risks in buying a franchise. Prospective franchisees understandably focus on how much it costs to open. The better question is how much the franchisor can require them to pay over the entire life of the agreement.

A Franchise Can Have Strong Sales and Still Be a Poor Investment

Gross sales are easy to celebrate. Profit is what pays the owner.

Suppose a franchise location produces $1 million in annual sales. That number may sound impressive. But revenue must cover labor, rent, inventory, utilities, insurance, debt payments, taxes, and the full collection of fees imposed by the franchise system. A royalty of 6 percent removes $60,000 before many of the franchisee’s other expenses are paid. Add a marketing contribution, local advertising requirement, technology charges, required software, training expenses, delivery commissions, and supplier costs, and the margin can narrow quickly.

This is why a financial performance representation based primarily on gross sales can provide an incomplete picture. A prospective franchisee needs to understand not only what a typical location may generate, but what remains after the cost of generating it.

The franchise fee is the price of admission. The continuing charges determine whether the business can provide an acceptable return.

Read Item 6 as a Whole

Item 6 of the Franchise Disclosure Document identifies other fees a franchisee may be required to pay. Many prospective franchisees review the table one line at a time. That is a mistake.

The fees need to be examined together because they are paid from the same business. A 6 percent royalty, 2 percent marketing contribution, 1 percent local advertising obligation, and several smaller technology and administrative charges do not operate independently. Collectively, they may consume a significant percentage of revenue before ordinary operating expenses are considered.

The review should also extend beyond the amounts listed in the fee column. Pay attention to:

• Whether a fee is fixed or can be increased
• Whether the agreement establishes a maximum increase
• How frequently an increase may occur
• Whether the franchisor has discretion to create additional fees
• Whether costs may be imposed through the operating manual
• Whether the franchisee must pay the franchisor’s then-current rates
• Whether a third-party vendor can change its pricing without limitation

A fee disclosed at $250 per month may look insignificant in a spreadsheet. If the franchisor can increase it without a meaningful cap, its present amount does not reveal the franchisee’s long-term exposure.

Technology Fees Can Become a Moving Target

Technology is necessary in modern franchise systems. Point-of-sale platforms, customer apps, loyalty programs, cybersecurity services, scheduling systems, data analytics, online ordering, and artificial intelligence tools can help a franchise remain competitive.

The question is not whether the system should evolve. The question is who decides what technology is required, who selects the vendor, who benefits from the arrangement, and who bears the cost.

Many franchise agreements give the franchisor broad authority to require new technology throughout the term. The operating manual may provide additional requirements that can be changed without amending the franchise agreement. As a result, the technology package described when the franchise is purchased may bear little resemblance to the package required five or ten years later.

Before signing, determine whether technology charges are capped, whether major replacements are anticipated, and whether the franchisor may require additional platforms at the franchisee’s expense. Ask existing franchisees how often the system has changed and what those changes actually cost.

Required Vendors May Carry Costs You Cannot Control

Consistency is a legitimate part of franchising. A franchisor needs the ability to establish quality standards and protect the brand. That does not mean the economics of required purchasing should escape scrutiny.

A franchisee may be required to buy inventory, equipment, uniforms, ingredients, insurance, software, or services from the franchisor or an approved supplier. Even when the direct fee appears reasonable, the required product or service may cost more than a comparable alternative.

The FDD should be reviewed to determine whether the franchisor or its affiliates receive rebates, commissions, or other revenue from required purchases. Prospective franchisees should also ask:

• Can additional approved suppliers be proposed?
• What happens if the required supplier raises its prices?
• Does the franchisor have an obligation to consider comparable alternatives?
• Is the franchisee responsible for freight, installation, support, or replacement costs?
• Does the franchisor profit from the required purchasing arrangement?

A payment does not need to be labeled a franchise fee to reduce the franchisee’s return.

Marketing Charges Deserve More Than a Percentage Review

Franchisees often assume that a national marketing contribution will directly promote their location. The agreement may promise much less.

The franchisor may retain broad discretion over how the marketing fund is spent. Money may be used for brand development, administrative expenses, agency fees, creative work, or campaigns that provide little measurable benefit in the franchisee’s market. The agreement may not require the franchisor to spend contributions in proportion to where they were collected.

Local advertising obligations can add another layer. A franchisee may be required to contribute to the national fund, spend an additional percentage locally, participate in regional cooperatives, and fund promotions or discounts mandated by the franchisor.

The right question is not simply, “What is the marketing fee?” It is, “What is my total required marketing expenditure, how can it change, and what control or reporting will I receive?”

Remodeling and System Changes Can Arrive Before the Investment Is Recovered

A franchise location that looks current today may not remain acceptable to the franchisor throughout a ten-year term. Franchise agreements commonly allow the franchisor to require remodeling, new signage, updated equipment, revised décor, or an entirely new brand image.

These requirements may cost tens or hundreds of thousands of dollars. They may also arrive before the franchisee has recovered the original investment or shortly before renewal, when the owner must decide whether to invest more money to remain in the system.

Review the agreement for spending caps, frequency limitations, advance notice, and exceptions for locations that recently opened or remodeled. If the agreement contains no meaningful limitations, include reasonable future capital expenditures in the financial model.

Delivery Platforms and Discounts Can Increase Sales While Reducing Profit

Systemwide promotions and third-party delivery platforms may produce additional revenue. They do not necessarily produce additional profit.

A franchisee may pay delivery commissions, credit card charges, technology expenses, and royalties on the full sale while also absorbing part of a customer discount. A promotion that drives traffic can still harm the franchisee if the unit-level economics do not work.

Prospective franchisees should determine who controls pricing, whether participation in promotions is mandatory, how royalties are calculated on discounted transactions, and whether the franchisor receives any separate benefit from a platform or vendor.

More sales do not solve a margin problem when the franchisee loses money on each additional transaction.

Model the Business Under Less Favorable Assumptions

The financial model should not assume that every fee remains at its opening-day amount.

Prepare alternative projections that account for higher technology charges, increased labor and product costs, required remodeling, additional marketing obligations, and slower-than-expected sales. Determine what happens if system fees increase by one or two percentage points in the aggregate. A small percentage of gross sales can represent a substantial portion of the owner’s remaining profit.

An accountant experienced with franchise businesses can help test the unit economics. Existing and former franchisees can provide equally valuable context. Ask them not only about revenue, but about unexpected costs, recent fee increases, required vendors, technology changes, and whether their profit margins have improved or declined.

Negotiate the Ability to Increase Fees

Franchisors are often reluctant to reduce royalties or eliminate standard fees. There may still be room to negotiate protections against future increases.

Depending on the system and the franchisee’s leverage, possible protections include:

• A fixed dollar or percentage cap
• A limit tied to the Consumer Price Index
• Restrictions on how frequently a fee may increase
• Advance written notice of an increase
• A cap on required capital improvements during the initial term
• Protection against new categories of fees
• A right to review material changes before they take effect
• Grandfathering negotiated fee terms through renewal

Even if the franchisor rejects a proposed change, the discussion reveals how it views its authority. A franchisor that insists on unlimited flexibility to increase charges is providing information a prospective franchisee should consider before investing.

The Question to Ask Before Signing

Prospective franchisees often ask, “How much does this franchise cost?”

Another question needs to be asked:

How much can the franchisor require me to spend after I have committed my capital and no longer have an easy way to leave?

The initial franchise fee matters. So do royalties, advertising contributions, technology expenses, supplier costs, remodeling requirements, mandatory promotions, and every provision that allows those obligations to change.

The franchisee I described did not face a single surprising charge. The larger problem was a contract that gave the franchisor repeated opportunities to change the financial bargain after the investment had been made.

A franchise agreement cannot eliminate every future expense. It should allow a prospective owner to understand the risk, measure the likely return, and decide whether the franchisor’s flexibility is commercially reasonable.

The best time to examine that flexibility is before the agreement is signed, the lease is executed, and the franchisee’s bargaining power has shifted.

ABOUT THE AUTHOR

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.

The franchise salesperson points to a map covered with colored dots.

Each dot represents a location. More dots are coming. The brand is entering new states, signing new franchisees, and projecting record growth.

Every dot looks like proof that the franchise is succeeding.

It may also represent another promise the franchisor must have the money and people to keep.

Prospective franchisees usually ask whether their location can make money. They study sales, rent, labor, royalties, debt, and opening costs. Those questions are essential.

But there is another business you need to evaluate before investing in your own.

The franchisor.

A strong concept can struggle under a franchisor that grows too quickly, lacks sufficient capital, or depends on selling new franchises to fund existing operations. Training may deteriorate. Field support may become difficult to reach. Marketing promises may exceed available resources.

You are entering a long term relationship with the company responsible for protecting and developing the brand.

Before you ask how quickly the system is growing, ask whether the franchisor is strong enough to support that growth.

Growth Is Not the Same as Health

Growth is easy to promote. Support capacity is harder to see.

A franchisor can award dozens of new territories and describe the demand as momentum. Yet every new franchisee needs training, site assistance, technology, marketing guidance, and operational support.

If franchisees multiply faster than support resources, the system may become less valuable to each owner even as the brand grows.

The Federal Trade Commission warns prospective franchisees that rapid growth does not guarantee franchisee success. A franchisor that expands too quickly may lack the financial resources or experience to provide the services it has promised.

Ask what has grown besides the number of locations. Has the training team expanded? How many field support employees serve the system? How long does it take to receive help with an operational problem?

The number of new locations tells you how effectively the franchisor sells franchises. It does not tell you how effectively the franchisor supports them.

Start With Item 21, But Do Not Stop at the Bottom Line

Item 21 of the Franchise Disclosure Document contains the franchisor’s financial statements. Established franchisors generally provide three years of audited financial statements, while certain newer franchisors may qualify for phased in requirements.

Many buyers flip past these difficult pages. That is a mistake. You may rely on the franchisor’s system for years. Its financial condition matters.

An audit does not mean the franchisor is financially strong. It means an independent accountant examined the statements and issued a report. Read the auditor’s opinion and footnotes, not merely the income statement.

Ask an accountant to help you evaluate:

• How much cash does the franchisor have?
• Can it meet its current obligations?
• Has it produced recurring profits or recurring losses?
• Is operating cash flow improving or deteriorating?
• Does the balance sheet show positive equity or an accumulated deficit?
• Is debt increasing?
• Are there significant obligations to affiliated companies?
• Do the footnotes identify uncertainty, unusual transactions, or dependence on related parties?

One bad year does not necessarily mean the franchise is unstable. A young franchisor may be investing heavily in people or technology. The goal is to understand why a loss occurred, how the company is funding it, and whether its explanation is credible.

How Does the Franchisor Make Its Money?

This may be the most revealing question in this article.

Healthy systems generally benefit when franchisees generate sustainable sales because ongoing royalties grow with franchisee revenue. The parties’ interests are not identical, but they are connected.

Concern increases when a franchisor depends heavily on initial fees, equipment sales, vendor payments, or other revenue collected before a location demonstrates success.

Initial franchise fees are not automatically problematic. But buyers should understand whether the franchisor has enough recurring revenue to support existing owners if franchise sales slow.

Ask the franchisor what percentage of its revenue comes from continuing royalties compared with initial fees and other sources. The answer may not be obvious from the financial statements. An accountant can help identify the right follow up questions.

Then ask something even more direct:

If the franchisor stopped selling new franchises for twelve months, could it still support the franchisees it already has?

Item 20 Shows What Is Happening to the Locations

Financial statements tell you about the franchisor. Item 20 helps you examine what is happening across the system.

Item 20 reports three years of openings, transfers, terminations, nonrenewals, reacquisitions, and other closures. It also identifies signed locations that have not opened and projected openings for the coming year.

Do not focus only on the total number of locations at year end. Study the movement underneath that number.

A system may open thirty locations while twenty others close, transfer, or leave the brand. The headline is growth. The more important story may be turnover.

Compare annual departures with the number of locations operating at the beginning of each year. Are closures increasing? Is the franchisor reacquiring troubled locations? Are many signed locations failing to open?

No fact provides an answer by itself. Transfers may reflect successful sales, while a closure may result from poor management. Several departures across different markets, however, deserve investigation.

Use the Item 20 tables to decide whom to call and what to ask.

Talk With the People Behind the Numbers

Current and former franchisees can explain what the documents cannot. Ask whether support has improved or declined as the system has grown. Find out how quickly the franchisor responds when sales fall, technology fails, or local marketing does not work.

Former franchisees may provide context for terminations, closures, and transfers. Ask what caused them to leave and how the franchisor responded when problems emerged.

Compare those conversations with Items 3 and 4 of the FDD. Item 3 discloses certain litigation involving the franchisor and other covered persons. Item 4 addresses bankruptcy history. Litigation is not unusual in business, and a lawsuit does not prove wrongdoing. Repeated disputes involving similar complaints may reveal a pattern worth examining.

You are not searching for a perfect franchisor. You are looking for consistency between its promises, financial capacity, system data, and franchisee experiences.

Ask the Franchisor to Explain Specifics

Bring specific questions to the franchisor rather than asking whether the company is financially healthy.

Ask:

• What investments are being made in training and field support?
• How many franchisees does each support employee serve?
• Why did terminations, closures, or transfers increase in a particular year?
• What happened to signed locations that never opened?
• Which services would be reduced if franchise sales slowed?
• What has leadership learned from locations that failed?

Strong franchisors should be able to discuss setbacks without becoming defensive. Evasive answers do not prove a serious problem, but they do not reduce the risk either.

Discovery Day is designed to help you become comfortable with the franchise. Use part of that day to become comfortable asking uncomfortable questions.

Investigate the Business Behind Your Business

An appealing product and enthusiastic owners do not eliminate the need for a financially stable and operationally capable franchisor.

Read Item 21 with an accountant. Trace the changes reported in Item 20. Review Items 3 and 4 for context. Speak with current and former franchisees. Ask whether the support organization has kept pace with franchise sales.

Most importantly, determine whether the franchisor’s financial success depends on helping franchisees succeed or simply on continuing to sell franchises.

Return to the map covered with colored dots.

Each dot represents more than growth. It represents a franchisee who invested money, accepted risk, and trusted the franchisor to deliver a system worth following.

Before adding your own dot to that map, make sure the company behind it is strong enough to keep its promises.

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.