Why Franchisors Don’t Like Negotiating
Contrary to popular opinion, the franchisee does have negotiation rights! Often times, due to the intimidating nature of the bulky Franchise Disclosure Document (FDD) and the franchise agreement (written in full legalese/hieroglyphics), the potential franchisee believes that they must adhere to all that is stated in the agreement otherwise the franchisor will not grant them a franchise. However it is important to realize that the franchisor has as much to gain from the transaction as you. Especially in this tight economy, franchisors are facing more challenges in bringing new franchisees to the fold and are more likely to be negotiating their “unflinching” terms with a potential franchisees.
The first impression that the franchisee gets from reading the franchise agreement is total incomprehension, unless they are well versed in legal terminologies and phrasing. The FDD is required to be in plain English but the franchise agreement has no such requirement. Typically, the franchisor’s legal department works extremely hard to secure the franchisor’s position through the Agreement and makes it impenetrable for someone who is not a lawyer to understand. The uniform nature of the agreement for all franchisees makes it assumed that the franchisee must sign the agreement so that all the franchisees follow the same terms. Even though that is partially true, the franchisee can plead their case and negotiate terms where they believe that they are offering something unique to the franchisor.
The most common arguments presented by franchising companies is that they need to keep all the franchisees under the same system, the franchisor lawyers won’t let them change anything, and that the owner would disagree with any revisions made to the franchise agreement. These arguments are valid but they are no excuse for you, the potential franchisee, to bear any unfair clauses. The franchise agreement does not protect the franchisee and does not ensure equal treatment. Therefore it is suggested that the franchisee has a specialist franchise lawyer go through the agreement beforehand.
Negotiation theorists have stated a technique called “the authority of the printed document”. Through this approach the franchisor usually has the upper hand since they have prepared an official printed document which easily intimidates the potential franchisee. The strength of the printed word is always stronger since it brings certain finality to the negotiation.
Franchisors do not wish to change their agreement terms on the ground that it incurs legal expenses and those are deemed as unnecessary or unwanted expenses for the franchisor. Another problem that arises for franchisors due to having numerous differing franchise agreements is that in their franchising events where the franchisees get together, there may be a creation of dissent amongst the franchisees if they find out that others had more flexible arrangements.
The franchise agreement is not set in stone and you should make sure that you negotiate the areas where you have some concerns. The bottom line, in this economic environment, don't assume that you don't have leverage in your negotiations.
The Ideal Franchisee - The Franchisee Point of View
Possessing an entrepreneurial mindset is a plus but one should also have the employee mindset as well. This lies in the fact that even though the franchisee must have the steely determination and drive to launch a business, they must be willing to be restrained and follow the directions of the franchisor. The level of control for a franchisee is noticeably less than of that of being an owner of your own independent business. However the level of risk presented to a franchisee is less than that of an independent business owner. Therefore this type of business is preferable for those looking for less risk. If we were to prepare a checklist of the traits, which were to be present within the ideal franchisee, it would appear something as:
Strategic and Structural Alternatives to Franchising
These are difficult decisions. The solutions are not clear cut from a business or from a legal perspective. It is critical that a company in this position work with qualified counsel to identify an alternative that will have a reasonable basis for an exemption and still make sense from a strategic perspective. The balance of this chapter will look at the many alternatives currently being tested by many U.S. and oversees companies. As you can see, the lines of demarcation are not always clear. The differences between many of these alternatives may in fact be in name only. Some of these concepts are truly innovative and have not been truly tested by the courts or the regulators. In these borderline cases, a regulatory “no-action” letter procedure is strongly recommended. Other concepts are not very innovative at all and merely borrow from long-recognized and analogous legal relationships such as chapter affiliation agreements in the non-profit arena or network affiliation agreements in radio and television broadcasting.
The Importance of Setting Clear Expectations
So my recommendation is as follows: As early in the relationship as possible, invest the time necessary to clearly describe the shared expectations for how you will work with your customers and, and how you will work with your employees. If you do this well, everyone will be on the same page and when you deliver something a little bit better than they expect, the will see you as someone they trust, like and want to be loyal to – a strong driver of success for any business.