Franchising is a marketing phenomenon whereby a business owner (franchisor) allows another party (franchisee) to conduct their business operations, which might involve marketing and distributing their products or any other service, using the franchisor’s business system.
Parts of the franchisor’s business system that the franchisee is allowed to use, albeit under agreed-upon conditions, may include branding and trademarks. The conditions that guide the franchisor-franchisee relationship are known as franchise agreements. A franchise agreement is a legally binding document that puts into writing, the terms and conditions that guide a franchise relationship between a franchisor and a franchisee, including the duration of the relationship and the extent to which the franchisee is allowed to use the franchisor’s business system.
It is important to note that franchise agreements are created to protect the rights of all the parties involved, therefore, care must be taken when negotiating these terms. In addition, certain tips can make negotiating a franchise business agreement easier, such as:
Always Negotiate Before Signing Anything
It doesn’t matter what proposal or document is brought before you, never sign anything without negotiating first. Even if it says “non-negotiable” on the franchise agreement, a skilled lawyer will be able to find loopholes in the document that makes it negotiable.
Negotiate The Initial Fee, Not The Royalty Fee
The royalty fee is a continuous payment and the major source of profit for franchisors, which means they are less likely to waver on the numbers. However, the initial fee is a one-time payment that franchisors do not consider a primary source of profit. Therefore, it might be significantly easier to get a franchisor to budge on the initial fee rather than the royalty fee.
Spend More Time Negotiating Flexible Terms Instead of Rigid Ones
Franchisors rarely negotiate certain elements like trademark provisions. However, other elements like the geographic territories are up for grabs. Furthermore, it is more advisable to be upfront and intentional about geographical territory negotiations because, if done properly, you can prevent the emergence of other competitive brands in the same geographic location. However, if left alone or approached lightly, the geographical region could remain open to other franchises, thereby creating competition.
Therefore, it is more favorable to negotiate more flexible terms, such as having geographic regions assigned to you for future expansion, than rigid ones like trademark provisions.
Usually, franchisors reserve the right to make decisions that encompass the entire company. However, as a franchisee, you can negotiate the right to make certain decisions that have localized effects. Consequently, these rights may include the right to obtain waivers that will exclude your company from any company-wide decision.
Navigating The Termination Agreement
A franchisee may reserve the right to terminate the franchise agreement if there is any breach in contract on the part of the franchisor. However, in the same vein, franchisors may reserve the right to impose time constraints, penalties, and other additions, that serve to discourage franchisees from breaching the agreement.
Some elements, like time constraints, are negotiable. However, as a franchisee, you should not be forceful in your pursuit to adjust termination clauses. It may seem as though you’re trying to create conditions where you’re allowed to get away with business or ethical practices that are less than ideal.