IFA Convention Roundtable on Negotiating a Franchise Agreement – or Not
03/23/2014I had the honor of facilitating a roundtable discussion on Negotiating the Franchise Agreement at the International Franchise Association’s 2014 Convention. Since I am often negotiating such agreements for franchisors and franchisees, the comments of the franchisor executives at this Business Roundtable Solutions program were quite enlightening.
One large franchisor representatives said that his company never negotiates any of the terms. Instead, as part of the “discovery” process they have 2 telephone conferences with each prospect (both of about 1 hour of duration) to discuss in detail the contents of the FDD and the terms of the franchise agreement. They not only explain what the terms mean, but why they are included. The representative reported that this exercise builds credibility with the prospects and, for those who sign up, also improve franchisee compliance with the terms of the contract.
Other franchisors have set programs for providing fee concessions for certain classes of franchisees. An example is royalty discounts for franchisees that open and continue to operate at least 3 locations. Another is reduced royalty rates for Annual Gross Sales over a specific threshold or “break point.” A creative version is a system of “service credits” that franchisees earn by remaining in compliance with “brand standards,” resulting in reduced royalty rates.
Some participants, generally from emerging systems, will negotiate an addendum to a franchise agreement on specific issues. Examples raised were removing “cross-default” provisions for franchisees that are purchasing additional locations; allowing the franchise owner to “designate” a spouse or child as an authorized successor owner, provided that person satisfies certain criteria; and reducing or eliminating personal guaranty liability for an existing franchisee taking over a “distressed location.”
BOTTOM LINE: As in most of life, whether a franchisor chooses to negotiate the terms of its franchise agreement depends on the franchisor’s position in the marketplace. A franchisor that is well-established or has a “hot” growing concept understandably will not negotiate. A franchisor that is struggling to grow often will be more flexible, particularly on issues of greatest risk for the prospective franchisee. However, what all participants agreed on was that a franchisor should shape and update the franchise agreement it offers to remove provisions that will unnecessarily burden the process of recruiting qualified, responsible franchisees.