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Franchise Agreement Negotiating Tips for Franchisees

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As a franchisee you’ll be bound by a franchise contract. Before you sign on the dotted line you should be comfortable with your franchise agreement. Here are some suggestions for dealing with key provisions.

Before signing a franchise agreement it’s important for you and your franchise attorney to be comfortable with the agreement you’ll operate under. Following are some suggestions for dealing with particular sections. Since franchise agreements will differ be sure you have a qualified franchise attorney to guide you along the way. Finally, be sure that any changes, clarifications or amendments to the franchise agreement are in writing and signed by both parties.

Preamble

If you have any questions regarding the services or products that you can market under the franchise agreement, be sure these are answered or clarified. You may be unsure if you can sell or market certain products or services.

Territory

There may be open territory adjoining the franchise territory you seek. You may be able to market that territory until it’s franchised. If you truly desire to have an additional franchise, you can request the franchisor to give you a “right of first refusal” which in its simplest terms, provides you an opportunity to acquire that territory if the franchisor receives a bona fide offer from another party for the same territory.

Mergers and Acquisitions

If the agreement has a provision, which allows the franchisor to acquire a similar business and operate within your territory, request the option to acquire this business upon the same terms as the franchisor. At the very least, be sure the franchisor can’t make this type of acquisition and use the franchise marks to compete against your franchise within your own territory. Be sure you and your attorney fully understand the “exclusivity” nature of your franchise.

Renewal Terms

Most franchise agreements require the franchisee to execute a release for all prior claims against the franchisor.  When you do renew this is an opportunity to “clean up” any old issues. You may request language to exclude certain “open items” from the release. Additionally, you can request that the franchisor release you from claims, which may have taken place prior to your renewal term. Be careful regarding upgrades and remodels so that this provision can’t be used against you. Keep in mind that a full release from any claims against the franchisor for the period prior to the renewal will prevent you from seeking recourse in the event there are any unresolved issues.

Royalty Payments

If you have a question regarding certain products or service royalties, get them clarified now. Don’t wait until you’ve signed the franchise agreement.

Advertising

If there is a minimum advertising requirement, you may wish to request a reduction for your first year. Those provisions, which require you to submit all advertising for franchisor approval, might require clarification. If approval is required, be sure you receive a quick response from the franchisor so you don’t have to wait an unreasonable period of time. Provisions regarding your mandatory participation in an “advertising fund” ought to be carefully reviewed by your attorney. You should request a copy of meeting minutes or program guidelines to review.

Site Selection Requirements

Since you’ll pay the rent for the location, be sure that you have a full understanding as to your obligations under the terms of the franchise agreement. Be sure your attorney carefully checks this section, and if necessary, you ought to request changes.

Modifications to the System

Franchise agreements have provisions, which allow the franchisor to modify certain terms of the franchise agreement via the Operations Manual. This type of provision can be onerous to a franchisee. You may wish to have language, whereby changes to the franchise agreement or operations manual cannot materially increase your financial obligations.

Financial Statements

Be prepared to submit the financial information that you are required to provide the franchisor under this section. You need to understand the difference between audited, certified and a compiled financial statements.

Personal Guarantee

Do not sign a blanket personal guaranty since it provides a franchisor rights to all of your assets in the event they receive a judgment or claim in their favor.  If you can’t eliminate this provision then seek a dollar cap on the personal liability.

Covenants not to Compete

If you have issues here “speak now or forever hold your peace.” If you are a conversion franchisee there may be pre-existing knowledge you have regarding the business.

Indemnification

The franchise agreement may require you to indemnify the franchisor regardless of whether or not a loss is the fault of the franchisee. This section requires careful scrutiny since it could hold you responsible for reimbursing the franchisor regardless of the cause. Your attorney can request to “soften” this language.

Minimum Performance Requirement

This section should be equitable. You don’t want to be in a position where you performed well for several years and then as a result of factors beyond your control are subject to termination. Be sure that you fully understand your obligations under this provision and request changes if necessary.

Assignment and Transfers

The franchisor will have a right of first refusal, which allows the franchisor to match any offer for the purchase of your franchise. You can try to remove the right of first refusal or at the very least shorten the period of time the franchisor has to exercise it. Some franchisors may allow changes to this section. You want to be sure that the franchisor cannot unreasonably withhold consent to an assignment. If the franchisor has a period of sixty (60) or ninety (90) days to exercise their rights, you could lose your buyer.

Termination

This is one of the most important provisions in your franchise agreement. Franchise agreements generally contain three termination categories: Automatic termination without notice; termination upon notice with no opportunity to cure; and termination with a cure period. You may be able to negotiate some of these terms.

Although there are numerous provisions and covenants to a franchise contract certain ones carry significant obligations and restrictions for franchisees. Be sure and your attorney identifies these items and if necessary negotiate language that satisfies you and your counsel.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

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