Franchise Agreements – Room For Negotiation?

If you are a potential Franchisee, wanting to buy a Franchise from an established Franchisor, you will be ‘offered’ their standard Franchise Agreement – which (in the UK) will most likely be based upon an approved British Franchising Association template. The word ‘offered’ is in inverted commas, because in this situation, it will be the ‘take it or leave it’ type of offer!

That said, any document which will bind you legally – with the potential hassle and costs which breach will inevitably involve – is an important document. Accordingly, if you are a potential Franchisee, please take the time to carefully read it, and to ensure that you fully understand and can accept its obligations, before you sign up to it.

Standard Franchise Agreements are very one-sided documents; heavily favouring the Franchisor – but they have to be.

An established Franchisor has a reputation to protect: a reputation which has been built by ensuring that all of its Franchisees operate in an identical way and to the same stringent quality standards. The Franchisor also has trademarks to protect, and knowhow and other confidential information which could be extremely valuable to his competitors.

If any Franchisee goes ‘off piste’ by not following the Franchisor’s standard branding guidelines, or by straying away from the Franchisor’s operating methods, the results could therefore be very serious. Not only could the Franchisor’s reputation be damaged, but the value of all the other Franchisees’ businesses could also be reduced.

The aim of the Franchise Agreement is therefore not only to protect the Franchisor – it is also to protect all of the Franchisees, by ensuring that everyone plays by the same rules.

For this reason, all the Franchisees will be required to sign up to the same fundamental obligations as each other. That doesn’t mean, however, that there is no scope for negotiation.

The terminology used in many Franchise agreements is unnecessarily onerous. For example, an obligation ‘to comply with all of the obligations set out in the Franchisor’s manual, and any others which are notified to the Franchisee in writing from time to time’ is so broad that it could potentially be used to require you to run naked down the High Street every morning before opening up for business!

So, as a Franchisee, what do you do when faced with clauses which are drafted so broadly?

If your potential Franchisor is long established and has a good reputation, then you may be willing to assume that this is just ‘lawyer talk’ and that, in reality, the Franchisor will operate reasonably and in the best interests of you both. It is worth doing your research though: if the Franchisor has a high turnover of Franchisees, then you will want to know why.

On the other hand, (and especially if the Franchisee is newly established,) there is no reason why you shouldn’t try to negotiate for an Agreement which more fairly reflect the intentions of the parties: After all, people who are unreasonable during initial negotiations don’t tend to become any more reasonable after the Agreement is signed – and an Agreement which spells out the Franchisor’s requirements in plainer English is not ‘fundamentally different’, just less likely to result in unnecessary misunderstandings.

Other clauses a potential Franchisee should look for in the Agreement – and which they may be able to negotiate – are those designed purely to raise additional revenue for the Franchisor. For example, a requirement for the Franchisee to purchase printed materials or other (non-food) supplies or services from a specific provider is simply likely to mean that the Franchisee will pay more, and that the Franchisor will obtain some sort of commission on each sale. It is reasonable for the Franchisor to require that the relevant goods or services mee tspecified quality criteria, but provided they do, then there is no reason why the Franchisee shouldn’t be allowed to use the supplier of his choice. (Food supplies may reasonably be excluded because of the obvious risk to the overall brand if a customer was to get food poisoning. Clearly, the Franchisor will want to keep very tight control over ingredient suppliers.)

One final point to make is what happens if another Franchisee fails to comply with the terms of the Agreement – adversely affecting your Franchise?

Contractually, there are a couple of ways to approach this. Ideally, each Franchise Agreement should require the Franchisor to protect the Franchisee’s business by enforcing the Agreements he has with his other Franchisees as necessary. A clause giving all other Franchisees the right to directly enforce each other Franchise Agreement where appropriate could also be included. However, these ‘legal’ options are costly and risky to try to enforce. Better, therefore, to look for a Franchisor who can demonstrate a good track record of developing good relationships with his Franchisees, spotting potential issues, dealing with them before they develop, and hence working for the benefit of everyone involved.

In summary, therefore, Franchise Agreements are long, complex, and often quite unreadable documents – but if drafted with the genuine intention of protecting both parties, and carefully checked before signature, they can be the launch-pad to a profitable business.

Happy franchising!