Whether you are a working-professional looking to expand your services through a well-known brand or a passive investor trying to diversify your portfolio, opening a franchise location can be a lucrative opportunity that enriches both the franchisor and franchisee. The following five tips will help potential franchisees identify and capitalize on important negotiating points before finalizing the deal.
1. Review the Franchise Disclosure Document
The Federal Trade Commission’s (FTC) franchise rules require franchisors to explain the basics of their franchise model by responding to 23 numbered items in plain English. The resulting document is known as the Franchise Disclosure Document (FDD). Potential franchisees should review a franchise’s FDD carefully to gain insights into the franchise’s business model. By consulting the FDD with an attorney and accountant, franchisees can uncover red flags that didn’t make it into the sales pitch and begin putting together a roadmap for negotiations.
2. Speak with Current and Former Franchisees
Item 20 of the FDD provides one of the most valuable resources for successfully negotiating a franchise agreement — the names of current and former franchisees. Speaking with these franchisees gives a potential franchise owner a better understanding of the time and effort required to create success under the franchise’s business model.
3. Explore Other Options
Potential franchisees who are willing to walk away from a bad deal have the most negotiating leverage and finding alternative options can help a franchisee know when to exit negotiations. For people who are simply looking for a passive investment strategy, the abundance of successful franchises that offer a predictable return makes this a relatively simple task, as they can easily find franchising opportunities in other industries. For people who are using the franchise to leverage their expertise in a particular field (i.e. accountants, dentists, gourmet pet-food chefs), finding an alternative option may entail buying-out a local brand, self-funding a new business, or continuing to work as an employee of an existing business until a better option presents itself.
4. Join a Franchisee Association
After the initial franchise agreement has been signed, the franchisee is bound to a contract that favors the franchisor. Even if the franchisor is an amicable business partner under the circumstances that existed on the signing date, unforeseen future events can turn the relationship toxic and give teeth to seemingly benign contract clauses. While a franchisor may be empathetic to the franchisees who are placed in a tough position due to events outside of their control, the franchisor’s preference for contractual uniformity makes them unlikely to negotiate with a single franchisee.
In these circumstances, there is little that an individual franchisee can do to waive or modify noxious clauses. Franchisees can overcome a poor negotiating position by joining, or creating, an independent franchisee association. Joining with other franchisees will give them strength in numbers and increase their leverage against the franchisor.
5. Hire an Attorney
Franchising agreements are accompanied by a collection of contracts that have specific terms and conditions, each of which can be negotiated. Common negotiation points for franchisees include territorial restrictions, transfer rights, development schedules, and termination clauses. The Attorneys at Skoubye Nielson & Johansen have the legal training necessary to identify provisions that are unfavorable to potential franchisees, and the requisite experience to propose alternative provisions that are fair to both sides.