Franchises and Franchise Agreements

Franchises and Franchise Agreements

Franchises can be a fantastic way for people to open their own businesses, especially for people opening their first businesses. The support, the training, and the business system provided by a good franchisor can significantly increase the chances of success. However, not all franchises or franchisors are created equal, and the prospective buyer must look very carefully at a myriad of factors.

Unfortunately, prospective franchisees often leave until the last minute one of the most important considerations – the franchise agreement. Maybe that’s because they believe that franchise agreements are non-negotiable, and to a large extent that’s true. However, we believe that is precisely the reason why the franchise agreement should be examined very early in the process of selecting a franchise, while there are a still at least a few alternatives still under consideration, for at least two reasons.

First, precisely because franchise agreements may be relatively non-negotiable, it makes sense to compare the provisions of the franchise agreement when considering alternatives at the same time other significant factors are being compared. A particularly unattractive franchise agreement can be a very good reason for rejecting one franchise opportunity in favor of another.

Second, while franchise agreements are relatively non-negotiable, very few are absolutely non-negotiable, provided the buyer has some leverage, and the franchisee’s leverage lies in his or her willingness to walk away from the deal. A buyer who has narrowed his or her choices down to a single franchise, found a location for the business, and maybe even attended some preliminary training programs has zero leverage because the franchisor knows that it will be very difficult for the buyer to walk away.

At the same time, some franchisors who might be willing to negotiate a few terms or provisions of the agreement may simply refuse to look at an extensive mark-up of their agreement, and there are a number of legitimate reasons. First, regulatory concerns may make it difficult for franchisors to make some changes. Second, franchisors may believe it is unfair for them to give some franchisees more favorable terms than others. Third is that consistency across franchisees may be essential for the efficiency of the franchisor’s own business and its ability to maintain the value of its brand.

As a result, a lawyer representing a prospective buyer who demands extensive changes to a franchise agreement, as sometimes happens with lawyers with no experience with franchising, is probably not doing his or her client any favors. We believe it is better for us to rely on our experience to give our clients an assessment of the overall agreement and, if appropriate, to suggest a few terms that are important enough to raise with the franchisor and that we believe may well be negotiable. If a franchise agreement is so one-sided that we cannot advise our client to sign it without extensive changes, we will recommend that the client walk away from the deal and continue looking for a better alternative. That doesn’t happen very often, but we believe that is sometimes the best service we can give our clients.

If you are considering buying a franchise, we invite you to contact us for an initial consultation -- and the earlier in the process, the better.