Buying A Franchise: Negotiation Strategies

Franchisees all too often sign franchise agreements without understanding their options, and then wonder later whether they could have negotiated for a better deal. The answer should always …

Franchisees all too often sign franchise agreements without understanding their options, and then wonder later whether they could have negotiated for a better deal. The answer should always be “yes,” because a franchisor unwilling to negotiate should be the first red flag. Some things prospective franchisees should consider doing include hiring a franchise attorney, eliminating personal liability conditions and the right of first refusal in the contract and avoiding deals that limit the ability to use social media in local marketing. For more on this continue reading the following article from Blue MauMau.

Recently, I was asked: "If you could negotiate any terms up front, what would be the key ones?" Here is my general approach:

  1. First, review the FDD and determine if they are using franchise brokers to sell. If so, you can knock off about 11-20k from the franchise price by asking for the broker’s rebate.

  2. Now, you have a budget and money. Use it to hire a professional franchise attorney who will negotiate the terms in the agreement that make sense for your situation. (And yes, franchisors will offer addendums or side agreements – the California has a database is full of such side deals. If you accept at face value that franchisors "won’t do x", then franchising is going to be a one sided deal for you.)

  3. Any terms that go directly to the franchisor’s business model, such as royalty rate and advertising spend are not on the table, except if you are going to be an area developer.

  4. Get rid of the personal liability condition – it is a millstone which will force you to continue funding a mistake. The franchisor is not guaranteeing anything, why should you? Never sign an agreement with an unlimited personal guarantee.

  5. Enumerate exactly the oral/written representations you are relying upon when signing the contract and carve out an exemption from the too general integration clause.

  6. You probably want a discussion about the choice of laws/forum selection clause.

  7. On item 7/8 in the FDD, you want written representations which clarify some of your concerns. Specific to your individual situation.

  8. Get rid of the cross default clause, and the obey all laws clause. These clauses transfer too much bargaining power, via threats, to the franchisor. They are also completely unnecessary. 

  9. Get rid of the right of first refusal, which will drive down the value of selling.

  10. Carefully review the liquidated damages clause, if there is one.

  11. Avoid any franchises which limit your use of social media for local marketing; these franchisors are already signalling that they are going to waste your money.

Those are the general areas, and there may be more important specific clauses of concern to you depending on your own business model. It is impossible to give good guidance on the territory issue, for example, with seeing the exact clause and knowing of your own local marketing ideas.

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You have the maximum bargaining power at the beginning of the relationship – just before you say "yes".

If you don’t have professional training in negotiation, hire an attorney who does have specialized skill in this area. Expect to pay between 7-10k to get an agreement which protects your rights. 

Do not waste your time trying to talk with other franchisees, if there is an independent franchisee trade association. Talk with them directly about how the franchise agreement has changed, for better or worse.

What additions would you make?

This article was republished with permission from Blue MauMau.


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