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Starting a Low Cost Franchise? Understand the Agreement

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 Agreement
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 Agreement
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 sell.
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 franchisor.

D. Advertising.
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 works.

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 members.

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 agreement.

Matthew Anderson is the founder of The Franchise Shop website which specialises in Low cost Franchises for sale, expert in franchise marketing and franchise ideas