In the world of franchising, the franchise agreement is the cornerstone of the relationship between the franchisor and the franchisee. This legal document outlines the rights, responsibilities, and expectations of both parties. While many potential franchisees feel they must accept the agreement as presented (particulary since many franchisors claim it cannot be negotiated), one franchise client demonstrated the power of negotiation—and the willingness to walk away—resulting in several crucial concessions that set them up for success.

The Initial Approach

Our client, a savvy entrepreneur with a keen eye for opportunities, was interested in a franchise. The brand has a decent reputation, and initial discussions with the franchisor were promising. However, upon reviewing the FDD and franchise agreement, we identified several terms that could potentially impact their business adversely. Instead of immediately signing on the dotted line, they decided to take a strategic approach to negotiation.

Identifying Key Issues

The first step was to identify the non-negotiable elements versus the negotiable aspects of the agreement. The client focused on:

  1. Initial Franchise Fee: The upfront cost was steep, and our client believed there was room for adjustment.
  2. Royalty Fees: The royalty fees seemed higher than the average in the industry, but a real issue was a mandatory minimum sales/royalties amount after one year.
  3. Territorial Rights: The agreement provided only limited protection against encroachment by other franchisees, which could affect market share.
  4. Renewal Terms: The conditions for renewing the franchise agreement were vague and potentially unfavorable.
  5. Marketing Fees: The percentage of revenue allocated to a brand fund was high, and there was an extremely unfavorable provision for additional marketing costs in the event mandatory sales minimums were not met

The Power of Preparation

Preparation was key to the client’s negotiation strategy. We conducted thorough research, gathering information on industry standards, comparable franchise agreements, and the specific franchisor’s performance metrics. Armed with this information, the client was able to make a compelling case for each concession.

The Negotiation Process

Negotiations began with an open and honest discussion about the client’s concerns. They approached the franchisor with respect but also with clear demands. The client’s willingness to walk away from the deal if necessary played a crucial role. This stance demonstrated to the franchisor that they were dealing with a serious and knowledgeable potential franchisee partner.

  1. Initial Franchise Fee Reduction: The client presented data showing average franchise fees within the industry. After several rounds of discussion, the franchisor agreed to reduce the initial fee, making the investment more manageable.
  2. Royalty Fee Reduction: The client achieved a royalty fee reduction for a period of a couple years, but most importantly the mandatory minimum royalty/sales amount was eliminated for the duration of the franchise agreement.
  3. Enhanced Territorial Rights: The client argued that stronger territorial protection would benefit both parties by ensuring market stability. The franchisor agreed to amend the agreement, granting the client exclusive rights within a larger radius, thus preventing encroachment by new franchisees. We believe this is extremely important in our metro area where everyone is “fifteen minutes away!”
  4. Clearer Renewal Terms: The client insisted on more transparent and favorable renewal conditions. The franchisor provided a detailed outline of the renewal process, including clear criteria for performance.
  5. Marketing Fee Revisions: The franchisor eliminated the brand fund requirement for a period of time.

The Outcome

The willingness to negotiate and the readiness to walk away if necessary were pivotal in securing these concessions. The final agreement was not only more favorable to the client but also set a precedent for a more collaborative relationship with the franchisor. This empowers the client to operate their franchise with confidence, knowing they have a much better agreement that supports their business goals.

Lessons Learned

For prospective franchisees, this case underscores the importance of:

  1. Thoroughly Reviewing the Franchise Agreement: Understand every clause and its potential impact on your business.
  2. Conducting Comprehensive Research: Know the industry standards and how other franchises operate.
  3. Being Prepared to Negotiate: Approach the franchisor with respect but be clear about your needs and expectations.
  4. Demonstrating Willingness to Walk Away: This is a powerful leverage tool in negotiations.

Negotiating a franchise agreement can be difficult, but with the right approach, it is possible to secure terms that provide a solid foundation for your franchise business. This client’s success story is a testament to the power of strategic negotiation and the courage to advocate for oneself in the franchise world.