Question and Answer

Question: I have made a deposit to a franchisor and received its standard franchise agreement. I am concerned by many of the clauses in the agreement and intend to seek legal counsel. Will my legal counsel be able to persuade the franchisor to soften the franchise agreement in my favour?

Answer: This question is very frequently asked by prospective franchisees.
In the majority of cases, for a variety of reasons that I will outline below, the franchisor will remain steadfast that the franchise agreement drafted be adhered to.

You many consider the clauses to be punitive or draconian, but the franchisor has little latitude to treat individual franchisees specially. Your legal counsel should concentrate on the five to ten points of most concern to you. A wholesales rewriting of the franchise agreement will not occur. If the franchisor was prepared to rewrite the franchise agreement in its entirety, that would be of more concern to me than if the franchisor agreed to change only very few of the standard terms in the franchise agreement.

Any franchisor who is prepared to make a special deal for you is prepared to make a special deal for the next franchisee behind you. Who is to say whether or not the deal will be even better than yours? A franchisor that exhibits this much flexibility is unlikely to be able to promote and enforce uniformity throughout the system, thereby ruining the value of the goodwill, trade-marks, and strength of the franchise system.

You do want to ensure that the franchisor is solvent so that it may continue to support you into the future. Accordingly, negotiating a reduction in fees could be a mixed blessing. You want the franchisor to have sufficient funds in an advertising pool so that you benefit from multi-unit advertising as well as enhancement in growth of the recognition of the trade-mark. You want the franchisor to be able to discipline maverick franchisees so that every operation is run as efficiently as yours and the general public can expect a consistent experience on every occasion, thereby marketing you concept for you.

You want the franchisor to be able to restrict competition from breakaway franchisees that might begin to compete with you in your territory to dilute the value of the goodwill of your business by creating a credible knockoff.

The above are only a few examples of issues that arise in the franchise system, confronting a franchisor and all franchisees. A strong franchise agreement is mandatory to empower the franchisor to protect your investment.

Consult legal counsel with franchise experience. You are far more likely to make headway with counsel experienced in negotiating with franchisors or even in representing franchisors dealing with franchisees in other systems.

Many lawyers have but fleeting experience with franchises but can consume large sums in legal fees through the futile, and often detrimental, exercise of negotiating with the franchisor and/or counsel for the franchisor.

You will likely want to have your counsel review the lease or sub-lease documents relating to your location. Experienced franchise counsel will also scrutinize the protection that the franchisor has obtained for the intellectual property in the system i.e. trademark, copyright, patents and the like.

In summary, hiring experienced franchise counsel will undoubtedly save you money in the long run by avoiding futile and excessive negotiation with the franchisor together with applying the skill and knowledge derived from dealing with multiple facets of the franchise system beyond simply the franchise agreement. Every franchisee should seek legal counsel. Every franchisee should seek independent business advice. Lawyers are not business advisors. Some accountants and consultants are very experienced in franchise matters.

Even though the cost of your due diligence may seem considerable prior to making your investment, you will avoid the plight of many franchise and other business investors in that the long term losses could vastly exceed the short term costs of proper due diligence.
In summary, do not try to change the franchise system in its entirety. If you are that discontent with the franchise agreement, invest in a different franchise system or start you own independent business.