Negotiating The Franchise Agreement
by Ed Teixeira
Any individual who signs a franchise agreement is executing a
legal contract, that requires certain obligations be fulfilled and
particular responsibilities met.
Although most individuals execute the franchise agreement in the
name of a corporation, franchisors typically require a personal
guaranty by the shareholders of that corporation. This prevents the
owners of the franchisee entity from avoiding personal liability to
the franchisor for certain obligations that could arise especially
in the case of termination for cause.
Before you sign the franchise agreement you need to be
comfortable with all of its provisions. In order to achieve this
comfort level you and your attorney may feel it necessary for the
franchisor to make changes to the franchise agreement.
When it comes to making changes to their franchise agreement
certain franchisors will negotiate terms of their franchise
agreement while others will not. In some cases the distinction is
based upon the size and maturity of the franchisor. For example,
McDonalds doesn’t have to negotiate their agreement while a new
franchisor may be far more willing to agree to changes in order to
sell a franchise. There may be other reasons as well.
Franchisors are not able to simply change provisions in a
franchise agreement but rather are guided by franchise regulations,
state statutes and sound business practice. However, certain
provisions can be negotiated and changed. The rule of thumb I used
was that the negotiated changes favor the franchisee. Additionally,
I considered the fact that as the franchisor when we would agree to
a change to our franchise agreement we faced the possibility that
our other franchisees could demand the same change to their
agreement. This served to guide our actions and many franchisors
follow this credo.
Before you even arrive at the point of actually negotiating your
franchise agreement there is a process that you’ll need to follow.
1. Engage An Experienced Franchise Attorney To Review The
If you intend to purchase a franchise you’ll need an attorney to
guide you along the way. Don’t be penny wise and pound-foolish.
Saving some legal costs during the initial franchise process could
cost you more in the long run. Be sure you use a franchise attorney.
2. Confirm That The Franchisor Will Negotiate Terms Of The
Some franchisors are adamant in the fact that they will not make
any changes to their agreement. Many of these franchisors are well
know and highly successful companies. On the other hand some
franchisors may have unreasonable or onerous terms in their
franchise agreement. In order to protect yourself make sure your
attorney reviews the agreement to identify any possible issues even
though you can’t negotiate the agreement.
3. Recognize That Certain Terms Are Non-Negotiable
Items such as royalty fees, territory size, termination
provisions, length of the agreement, non-competes and legal venue
are examples of what are considered the “untouchable” provisions.
Few if any franchisors will negotiate or change these provisions.
You can ask the franchise salesperson for guidance in this area.
Once you receive a copy of the franchise documents for review you’ll
know what is non-negotiable. This way your attorney can focus on
those particular sections, which could be problematic. You’ll save
time and needless legal fees.
4. Focus On The Important Points In The Agreement
I’ve dealt with countless attorneys. Some focused on provisions
in the franchise agreements that were not very important compared to
others. Make sure you and your attorney concentrate on the items
that can impact the day-to-day operations of your franchise.
Examples of these provisions include:
A. Restrictions on products and services that you wish to
Be sure you have a clear understanding as to what you can or cannot
sell from your franchise. Whether its goods or services you’ll want
to avoid any possible misunderstandings or issues after you’ve
signed the franchise agreement.
B. Marketing or selling in “open” territories.
Try to obtain a right of first refusal for adjoining
territories, which are “open” and not yet franchised. Some
franchisors are willing to grant this request. This can give you an
opportunity to acquire more franchises or territory if the
opportunity presents itself.
C. Indemnification Provisions.
Be careful that you’re not held liable for loses or damages that
are not caused directly by the acts of you or your employees. You
may request language, which does not require you to indemnify the
franchisor if you follow the procedures and policies of the
Provisions that require you to spend a set dollar amount or
per-cent of sales on advertising may be lowered during your first
few years of operation. You can also request that your failure to
meet, for example no less than 75% of your advertising spending
requirements won’t be grounds for default. If the franchisor has an
advertising fund, which its franchisees must contribute to be sure
that you have a good understanding of, how the advertising fund
E. The Transfer and Assignment Section.
This section presents the conditions and requirements for
selling your franchise to a third party. Your ability to sell your
franchise may contain some restrictive language. Be sure your
attorney carefully reviews this section and that you understand your
responsibilities and rights. Many franchisors are willing to grant
some changes to this section, which include the time, that the
franchisor has to exercise their right of first refusal. Another
area to focus on is the assignment of your franchise to family
These represent some of the more noteworthy examples of sections
in a franchise agreement, which you and your attorney may wish to
negotiate. A franchise agreement is a complicated document and by
design it favors the franchisor.
Make sure that before you sign on the “dotted line” you fully
understand your obligations and are comfortable with the final
© 2005 Ed Teixeira
Ed Teixeira is author of
Franchising from the Inside Out. Ed has over 25
years of experience in the franchise industry. He has held
executive positions with a number of leading franchise companies
in industry sectors including manufacturing, retail and
healthcare. Ed was also franchisee of a multi-million dollar
healthcare operation with six locations. Visit his site at