As you consider buying a franchise, you may be wondering whether you will have any opportunity to negotiate with the franchisor regarding the terms in the franchise agreement before you sign on the dotted line. Some people in the industry will tell you no, that franchise agreements are never negotiable or worse yet, that negotiating franchise contracts is illegal. In either case, those people are wrong.
Federal law — specifically, the Federal Trade Commission’s (“FTC”) Franchise Rule — does not prohibit a franchisor from negotiating a franchise agreement with a potential franchise buyer; in fact, the FTC has said “franchise sellers and prospective franchisees may negotiate contract terms without violating . . . [the Franchise] Rule.” Moreover, there are no laws in any state that prevent or prohibit a franchisor from negotiating, either. While California does have a special law regarding additional filings and/or disclosures required for negotiated sales in that state (read my article about that law), that law is not intended to, and doesn’t, discourage negotiations in franchise sales. There is no law or legal requirement anywhere that requires a franchisor to have absolute uniformity among all of the franchisees in its franchise system, either.
If the terms of a proposed franchise agreement are not acceptable to you, then you should attempt to negotiate changes to the contract with the franchisor. If the franchise company tells you to “take it or leave it,” then you’ll have to decide whether you can live with the contract as it is, or continue looking for a franchise or other business opportunity that is acceptable to you.
All of these things being said, a franchisor also is not required to negotiate with its prospective franchisees. Many franchise companies take the position that, from a business perspective, they will not negotiate with franchisees because they value absolute uniformity in the system and that this uniformity must include the franchise agreements themselves. Other franchisors will not negotiate because they fear backlash from other franchisees who did not have the benefit of negotiating their own franchise contracts. It is not at all uncommon for large franchisors to completely refuse to negotiate with prospective franchise buyers for these reasons, or simply because the laws of market economics (supply and demand) mean that they can easily find another buyer for a franchise who will not insist on negotiation.
In any case, even if you are committed to buying a franchise without the benefit of negotiating special terms with the franchisor, it never hurts to ask. Your franchisor may be willing to negotiate certain terms with you. As I discussed in my article “Beware of Dabbling Franchise Attorneys! Part 1,” this is one of the reasons it is important for a prospective franchise buyer to consult with an experienced franchise attorney: an attorney that understands franchising will likely know what terms a franchisor may be willing to negotiate, and which terms won’t be negotiable.
One final point: if you are successful in negotiating new or additional terms to a franchise agreement with your prospective franchisor, these terms will probably not appear directly in the body of those contracts. Most franchisors that do negotiate with franchisees include all of the terms in a separate document called an “Addendum.” The Addendum will say that in the event of a conflict between the language in the franchise agreement and the language in the Addendum, the Addendum will control. The reason franchisors use this approach is for ease of tracking and administration; it is much easier for a franchisor to determine what additional, different, or special terms apply to any given franchisee’s agreement if they are contained in an Addendum versus trying to determine what may or may not be different in that franchisee’s form agreement.
Next time someone tells you that a franchise agreement is not negotiable because it’s illegal or because franchise agreements can never be changed for a specific deal, you’ll know better.
If you are thinking of buying a franchise and need help understanding your franchise disclosure document and franchise agreement, we can help.
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