What are Common Negotiable Terms in a Franchise Agreement?
If you’re in the process of purchasing a franchise, you have probably been provided with a Franchise Disclosure Document (FDD) and a Franchise Agreement. The terms of these agreements have vital implications for the future of your business. Which of the terms are negotiable, and which are not?
Naturally, it depends greatly from franchisor to franchisor what terns if the Franchise Agreement are negotiable. But some of the terms that are often subject to change in franchisees’ favor are as follows.
Right of First Refusal of Adjacent Franchise Territories. Each franchisee often has the right to a specific geographical area. If another potential franchisee wants to purchase an area next to yours, you might be able to get the right of first refusal so that you have to be offered that territory before someone else can purchase it.
Franchise Renewal Fees. Franchisees often have to pay a “renewal fee,” a payment that comes due when the term of their franchise agreement ends. This might increase significantly by the time the renewal period comes. To avoid sticker shock, you may be able to negotiate a lower fee, or at least limit the amount that the fee may increase.
Franchise Transfer Fees. These may also be negotiated by franchisees. The transfer fee is payable if you sell your right to the franchise to someone else. If you want to cash out and retire, the transfer fee could potentially take much of the nest egg that you’re anticipating. Better to address it sooner than later.
Personal Guarantees in the Franchise Agreement. These fees might also be negotiated away by franchisees. Your Franchise Agreement might require that you give a personal guarantee, meaning that if there is a dispute, the franchisor can come after your house and your personal assets. The whole purpose of establishing a separate company for your franchise is to prevent personal liability from creditors’ claims, though. It should be no different when it comes to your franchisor, who, when it comes down to it, is just another creditor.
Just as there are a seemingly infinite number of franchisors, there are endless possibilities to what agreements you might be able to negotiate in your Franchise Agreement. But these need to be negotiated before you enter the agreement – not after.
If you are purchasing a franchise, or have already purchased one and need legal advice, give us a call at 980-999-3557 to see how we can help your business succeed.