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Negotiating the Franchise Agreement

Now that we’ve discussed the franchisor’s point of view and arguments towards negotiating the franchise agreement, here are a couple of tips for not wasting time on trying to negotiate items which franchisors do not alter and concentrating on the change-able clauses in the Franchise Agreement.

Before going into the negotiating aspect, one must always ask the franchisor whether they are willing to negotiate. Usually franchisors state that they have a rigid Franchise Agreement and that it is not open to negotiating. However, there may be some instances where the franchisor may allow some flexibility. Stated below are a few tried and tested tips for negotiating franchise agreements and which areas to concentrate one’s efforts on.

1. The initial fee is more likely to be reduced than the continuing royalty fee rate

Rather than debating over discounting the royalty fee, it is more advisable to work on something that actually may be adjusted. The royalty fee is the major income generator for the franchisor and as a result they are very unlikely to consider negotiating their long term revenue stream. The initial fee however may be adjusted by the franchisor since it is just a one-time payment and they are not relying on it to make profits. It is simply the fee to join and thus it can be reduced if it is brought up by the negotiators on the side of the franchisee.

2. The territory geography is more likely to be altered by the franchisor on your request than the scope of the rights and protections enjoyed within the territory

Rather than negotiate on the rights and privileges you, as the franchisee would have, it is suggested you concentrate your efforts on negotiating the geographic territory you can hold for your future expansion plans. Negotiating on the geographic territory should be conducted anyway since it would work against you if you got the lease to a single franchise while the geography remained open to other franchisees who would eventually become your competitors in that geographic area. So rather than debating over increased rights and protections in your territory, you should debate as to the availability of greater geographic areas to be held for you and your expansionary plans.

3. The timing of opening for business more likely to be negotiated by the franchisor than the grounds available for termination by the franchisor

As a franchisee you would be bound by the timings imposed by the franchisor or the property owner where your outlet is located. If the timings are set by the franchisor, it is recommended to negotiate over that to ensure maximum flexibility/cushion and avoid negotiating on the termination clauses of the franchise agreement. The termination clauses are usually concrete and inflexible since they are those aspects of the relationship which the franchisor feels strongly about. It also reflects poorly if you negotiate over the points made to dictate your performance. It would appear as if you are asking for permission to perform poorly and to remove the clauses which would otherwise stop you from doing so.

4. Franchisors will rarely, if ever, negotiate on the trademark provisions

Spending time on negotiating over trademark provisions is futile. Trademarks are the property of the franchisor and are probably the greatest asset to the franchise. The McDonald’s logo and emblem is the reason why so many people identify with the brand. They would never risk their trademark’s strength by diluting it through shared control by the franchisee. It is therefore best for the franchisee to avoid treading on the sensitive topic of negotiating on the trademark provisions.

These are simply a few of the possible topics available for discussion during the negotiations between the franchisee and franchisor. Depending on the franchise, there may be additions to the negotiation topics but as a general rule, it is best to stick to the mentioned topics for discussion and to avoid those forbidden above.

Franchisee Insight: Learning from Franchisor Litigation (or Lack Thereof)

The Item 3 disclosure requirements are complex compared to other items of the FDD, but they can generally be summarized as follows. In Item 3, franchisors must disclose:

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