Traditionally, franchise agreements were not negotiable. However, in our experience, franchisors have become more willing to negotiate terms and obligations contained in a franchise agreement. This trend is likely to be further influenced by the Unfair Contracts Regime which applies to small business standard form contracts. A franchisor who is open to negotiating key terms in a franchise agreement, may be less likely to have the franchise agreement considered a standard form contract.
Understanding Franchise Agreements
Franchise agreements are legally binding contracts that outline the rights and obligations of both the franchisor (the company granting the franchise) and the franchisee (the individual or entity receiving the franchise).
The franchise agreement will usually set out your obligations as a franchisee, including:
1. Intellectual Property: The franchise agreement details the permitted use of the franchisor's trademarks, logos, trade names, and other proprietary assets.
2. Franchise Fees: The franchise agreement outlines your financial obligations, such as upfront fees, ongoing royalties, advertising contributions, or other payments to the franchisor.
3. Territory and Exclusive Rights: The franchise agreement defines the geographic area where you are allowed to operate. The franchise agreement also sets out whether you have exclusive rights to that territory or whether other franchisees are allowed to operate within that territory. Territory rights may also include an exclusive territory for marketing purposes only. That is, you might market in and receive inquiries exclusively from a territory, but other franchisees may be able to operate in that territory.
4. Operating Standards: The franchisor establishes specific guidelines, standards, and procedures that you must follow to maintain consistency in the business operations, product quality, customer service, and branding.
5. Training and Support: The franchise agreement may outline the training programs and ongoing support that the franchisor will provide to you, including initial training, operational assistance, marketing support, and access to proprietary systems or technologies.
6. Term and Renewal: The franchise agreement will specify the initial term of the franchise agreement and any renewal options. There will usually be specific steps that you need to follow in order to renew the frachise agreement for a further term. In addition, the franchise agreement will set out the conditions for termination or non-renewal.
7. Transfer and Exit Options: The franchise agreement may address the conditions and procedures for transferring ownership of the franchise to another party or selling the business, as well as any restrictions or approval requirements.
8. Dispute Resolution: The franchise agreement must include provisions for resolving any disputes that arise between you and the franchisor, such as through negotiation, mediation, or arbitration.
It is essential that you thoroughly understand the terms, and conditions outlined in the franchise agreement before entering into any contractual obligations. This includes reviewing the franchise agreement with a franchise lawyer to ensure compliance with relevant laws and regulations. By understanding the agreement, you can make informed decisions and negotiate terms that are more favourable to your business interests.
The Importance of Negotiation in Franchise Agreements
Negotiation plays a crucial role in franchise agreements as it allows you to tailor the terms of the franchise agreement to better suit your needs. While franchise agreements may seem non-negotiable at first, you can still request amendments. This is important for a number of reasons. Firstly, you can get an idea of how rigid the franchise system is, and you can take this into account when considering whether the franchise is the right fit for you. Secondly, if the franchisor is not receptive to negotiating the terms of the franchise agreement, it is more likely that the franchise agreement is a standard form contract and the Unfair Contract Terms regime will apply.
Through negotiation, you can address specific concerns or requirements that may not be adequately addressed in the standard franchise agreement. This could include modifications to royalty fees, territorial rights, training and support, advertising contributions, and renewal terms. By negotiating these terms, you can potentially reduce costs, increase profitability, and establish a stronger foundation for your business.
Factors That Determine Negotiability
The negotiability of franchise agreements can be influenced by various factors. One such factor is the size and reputation of the franchise system. Established and well-known franchisors may have less flexibility in negotiating their franchise agreements due to standardised operating procedures and brand consistency. On the other hand, smaller or newer franchisors may be more open to negotiation as they seek to attract franchisees and adapt to market demands.
Additionally, the industry in which the franchise operates can impact negotiability. Some industries may have more standardised franchise agreements, leaving less room for negotiation, while others may have a history of negotiation and customisation.
Lastly, your individual negotiating skills and leverage can also affect the negotiability of the franchise agreement. Franchisees who have relevant industry experience, strong financial standing, or a unique value proposition may have more leverage in negotiations.
Common Negotiable Terms in Franchise Agreements
While each franchise agreement is unique, there are several common terms that you can often negotiate. These include:
1. Royalty fees: You may negotiate the percentage of sales that you are required to pay as royalties to the franchisor. Lower royalty fees can help increase profitability.
2. Territory rights: You may negotiate the exclusivity of your territory or seek additional territories to expand your business.
3. Training and support: You may request additional training or support from the franchisor.
4. Advertising and marketing contributions: You may negotiate the amount you are required to contribute towards advertising and marketing efforts.
5. Renewal terms: You may seek more favourable renewal terms.
6. Termination terms: You may seek the removal of any unfair termination terms, to better protect their investment in the franchise.
It is important for you to carefully review these terms and identify areas for negotiation that align with your business goals and priorities.
Tips for Effective Negotiation in Franchise Agreements
Negotiating franchise agreements requires careful preparation and strategy. Here are some tips to enhance the effectiveness of your negotiations:
1. Understand your needs: Clearly define your business goals and priorities before entering into negotiations. Identify the terms that are most important to you and focus your efforts on those areas.
2. Research and gather information: Conduct thorough research on the franchise system, industry standards, and comparable franchise agreements. This will provide you with a better understanding of what is negotiable and help you make informed arguments during negotiations. A search of the Franchise Disclosure Register may provide you with valuable information.
3. Seek legal advice: Engage a franchise lawyer who specialises in franchise agreements to guide you through the negotiation process. A franchise lawyer can help you understand the legal implications of the agreement and ensure your interests are protected.
4. Communicate effectively: Clearly articulate your needs and concerns to the franchisor. Be prepared to provide supporting evidence or market data to strengthen your arguments.
5. Be flexible and open to compromise: Negotiations are a give-and-take process. Be willing to compromise on certain terms while staying firm on others. Focus on achieving a mutually beneficial outcome.
Key Takaways
Franchise agreements are legally binding contracts that outline the rights and obligations of both the franchisor and the franchisee.
While traditionally these agreements were not negotiable, there is now a trend towards more flexibility and willingness to negotiate terms such as:
- royalty fees,
- territory rights,
- training and support,
- advertising and marketing contributions,
- renewal terms, and
- termination terms.
To enhance the effectiveness of negotiations, it is important to understand your needs, conduct thorough research, seek legal advice, communicate effectively, and be flexible and open to compromise.
While by following these tips, you may be able to achieve more favorable terms in your franchise agreement, there may also be situations where the franchisor offers the franchise agreement on a take it or leave it basis.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
