Franchise Agreement Negotiating Tips for Franchisees
by Ed Teixeira
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.
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.
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.
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.
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.
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
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.
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.
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
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
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”
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.
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
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