“Take it or leave it.” While hearing a franchise salesperson utter these words is less common than it used to be, high-pressure tactics remain a central component of the sales process in many franchise systems. Although buying a franchise is a unique and high-risk investment, franchisors use traditional methods to sell franchises, and their salespeople get paid on a commission basis. This means that they have a financial incentive to close as many sales as possible, and the last thing they want is for their commission to get held up due to franchise agreement negotiations.
As a result, franchise salespeople will often imply that there is no room for negotiation in the franchise agreement. They may say things like, “Our franchisor doesn’t agree to changes,” or “We already offer better terms than any of our competitors.” Regardless of whether or not these statements are true (which is another matter entirely), the simple fact of the matter is that all franchisees have the right to make informed decisions and protect their investments.
In fact, most good franchisors will not only be willing to negotiate reasonable modifications, but they will even expect quality franchise candidates to request changes to their standard terms. The reason for this is simple: Franchisors know that their agreements are heavily one-sided. They know that franchisees who accept their standard terms are taking a huge risk, and they know that they need to be reasonable in order to attract top talent.
Key Risks of Signing a Franchise Agreement Without Negotiation
What is at risk if you blindly accept a franchisor’s standard contract terms and sign on the dotted line? Here is just a small sampling of the types of franchisor-friendly provisions that have become commonplace in franchise agreements:
- Minimum Royalties – Even if you are unable to earn enough to cover your monthly expenses (not to mention pay yourself a salary), you may still owe money to your franchisor.
- Lost Future Royalties – If you shut down because you cannot earn a living, or if your franchisor terminates your franchise agreement, you could still be on the hook for the royalties you would have paid had you remained in business.
- No (or Limited) Territory Rights – If you aren’t careful, you could find yourself competing directly against your franchisor or another franchisee. This could be the case if your franchise isn’t profitable enough for your franchisor, or if your franchisor wrongly believes that your geographic area can support two locations.
- Jurisdiction and Venue – If you need to take legal action against your franchisor, you may be forced to go through costly arbitration proceedings in the city where your franchisor’s headquarters are located.
- Non-Competition and Non-Solicitation Covenants – You thought your franchise was your business? When your franchise agreement ends, you may find not only that you are prohibited from contacting your customers, but that you are also prohibited from using your education and experience to start a new business.
Speak With National Franchise Attorney Jeffrey M. Goldstein
If you are thinking about buying a franchise, it is critical to have the Franchise Disclosure Document (FDD) and franchise agreement reviewed by an experienced attorney. To learn about our firm’s fixed-fee franchise business review services, please call (202) 293-3947 or inquire online today.