Negotiating with a Franchisor
After you have digested the FDD, you may think the next step is haggling with the franchisor. After all, haggling—or negotiating—is the business way, right? In most situations, this would be correct. But striking a bargain is not a phrase in the vocabulary of most franchisors.
Franchising’s strength is its consistency. It is what both you and your future customers will depend on. If a franchisor is willing to negotiate substantial changes with you, likely it has done so with others. That’s not necessarily a good thing. But there are some areas that you may be able to negotiate which will have little effect on the system’s consistency and can provide you with some significant benefits:
- Changing the size of your protected territory or possibly granting you a protected or exclusive territory if the franchisor doesn’t typically include one.
- Additional grand-opening support.
- Additional training for you and your staff.
- Extra field support.
- Elimination of transfer fees should you want to ever sell your franchise.
- Payment terms for the franchise fee.
- Extended cure periods should you ever need to cure a default in your operation of your franchise. This item is important, because if you don’t cure a default in a timely fashion, you could lose your business.
- A change in your startup date, giving you more time to find and build out your location.
- The formula for calculating the franchisor’s purchase price for your business on termination.
- Lower fees for conversion franchisees (independent operators converting over to the franchisor’s system and brand): Conversion franchisees may be able to negotiate lower fees, or a longer time to liquidate existing inventory, switch to the franchisor’s computer system, or make other system modifications.
- Right of first refusal: A franchisor may be willing to give up or modify any right of first refusal it may have if you try to sell your franchise before the term of the agreement expires. A right of first refusal refers to a franchisor’s right to match a bona fide offer you received from someone to purchase your business.
- Guarantees and limited liability: Although you may form a corporation to own the franchise rights for tax or liability purposes, the franchisor is relying on you personally to meet the commitments contained in the franchise agreement. One of the documents you will be asked to sign will probably be a personal guarantee for performance under the franchise agreements. On occasion, if you are well capitalized or have other collateral, a franchisor may be willing to waive the requirement that you personally guarantee the agreement, or the franchisor may be willing to limit your liability under the guarantee.