Franchisors who are willing to negotiate any part of their franchise agreement are by far the exception rather than the rule. In fact, the rule is something like, “what part of ‘no’ do you not understand?” Of course, there are good reasons for franchisors to stand pat (namely that they can but also to maintain the integrity and uniformity of their franchise deals) and some franchise agreement provisions are simply inviolable, like those dealing with royalties, franchise and ad fees and term. But what most prospective franchisees don’t realize is that the counterparty sitting across the table generally considers the entire franchise agreement to be, well, off the table. That’s because franchisors are unquestionably drawing up the menu and prospective franchisees generally are not even really seated.
The franchisor’s penchant for intransigence is not exactly a secret. Most industry players know and accept that the franchise agreement is generally engraved rather than penned. Sometimes, though, the franchisor may be willing to negotiate. That’s sometimes – but by no means always – the case in two circumstances: (1) the prospective franchisee intends to purchase a large number of units and/or (2) the franchisor’s pipeline of buyers is dry.
So how does this generally one-sided relationship between the franchisor and prospective franchisee get reflected in the franchise agreement? The unsurprising result is a one-sided agreement. From the prospective franchisee’s perspective, it’s all give and very little take.
A typical franchise agreement is larded with franchisee obligations and restrictions – many of which can be incurable in the breach. Don’t spend too much time looking for reciprocal provisions that bind the franchisor: you’re more likely to find a lot of rights and very few obligations and even fewer restrictions.
Let’s take a look at just one of the more obvious imbalances: assume something goes awry and one party thinks the other has not met its obligations under the contract.
A typical franchise agreement will provide a laundry list of the circumstances under which the franchisee is in default and whether that default can be cured or fixed so as to avoid termination. There is generally no reciprocal provision that tells you when a franchisor has defaulted. So, for example, a franchisee typically will be in default and the franchise agreement will automatically terminate if the franchisee becomes insolvent or is adjudicated bankrupt. Likewise, a franchisee usually will be deemed to be in default without an opportunity to cure if, for example, he or she defaults more than once on a curable default within a specified period, refuses to permit the franchisor or its agents access to conduct any required inspections or uses the trademark in an impermissible manner. While some states may override these contractual terms by imposing a “good cause” requirement, for the most part, the franchisor remains at the head of the table.
And what happens if the franchisor defaults? A franchisee may have a breach of contract claim but the franchise agreement generally will not have any self operative provisions such as automatic termination or the right to terminate after a franchisor’s failure to cure a default or contract breach.
If the franchisor terminates the franchise agreement, there may be a liquidated damages provision that can be pretty steep. For example, the American Bar Association’s Annotated Franchise Agreement provides for liquidated damages in the event of the franchisor’s termination in “an amount equal to of 3 ½ times the continuing royalty fees payable to the Franchisor in respect to the last 12 months of the [franchisee’s] active operations or the entire period the [franchisee] has been open for business, whichever is the shorter period.” Yikes. And, you guessed it: there are never (at least in my experience) any liquidated damages for the franchisee.
In addition, all of your covenants, indemnities and agreements as both the franchisee and the personal guarantor will survive termination. And right again: there is generally no reciprocal provision for the franchisor.
If a dispute arises under the franchisee agreement, the parties generally must resolve that dispute in the location, under the State law and in the manner chosen by the franchisor. On the latter, franchisors will typically compel you to arbitrate your disputes rather than resolving them in front of a jury where you generally may have a more sympathetic ear. Certain States have franchise laws that may curb or override these requirements, but only if you live in or operate your franchise in that State.
While all of this may sound discouraging, it should not be surprising. In most business relationships, the party with the power usually exercises it to the disadvantage of the party without it. Most of us don’t go to our banker, broker or cable TV provider with any expectation other than to be told where to sign. The same is true with the franchisor/franchisee relationship. So it helps to be realistic about what to expect. But it never hurts to ask for something in the franchise agreement. If you do, there’s an outside chance you may exact a concession; if you don’t, there’s about a 100% chance that the franchisor will not offer any. A qualified franchise attorney can help you understand whether a franchise agreement is subject to negotiation and, if so, what concessions the franchisor may consider.
Mike Sheehan is a franchise consultant and attorney. He is the president of Focus Ventures (www.focusonfranchise.com) and formerly served as a securities attorney and as general counsel for a Fortune 100 financial services company. His Franchise Focus Blog (www.franchisefocus.blogspot.com) focuses on helpful information, tips and current news for prospective franchisees.
This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult your own franchise attorney concerning your own situation and any specific legal questions you may have.
© 2012 Mike Sheehan. All rights reserved.