As a prospective franchisee, it is important to set reasonable expectations. On the one hand, you do not want to expect too much and set yourself up for disappointment (or failure). On the other, you do not want to expect so little that you fail to give adequate consideration to the legal risks (and opportunities) involved with buying a franchise.
1. Franchise Agreement Negotiations
Reasonable: Negotiating Overly One-Sided Provisions of the Franchise Agreement
Let’s start with negotiating your franchise agreement. Yes, you can negotiate; and, yes, most franchisors will consider reasonable requests to modify the overly one-sided provisions of their agreements. For example, if your agreement contains a non-compete clause, you may be able to negotiate a carveout that allows you to start or work for a company relying on the skills you acquired before you acquired your franchise.
Unreasonable: Negotiating System-Wide Standards and Terms
However, most franchisors will not consider negotiating the standards that they apply to franchisees on a system-wide basis – think mandatory suppliers and obligations to comply with the Operations Manual. Negotiating these types of provisions could make managing the franchise system untenable; and, as a result, requests for modification will usually be non-starters.
2. Franchise Due Diligence
Reasonable: Gathering Information from Current and Former Franchisees
When conducting your due diligence, you can expect to receive valuable information from current and former franchisees. The types of information they provide may be different (for example, former franchisees may be more willing to speak negatively of the franchisor), but everything you hear will help you make an informed buying decision.
Unreasonable: Obtaining Proprietary Information from the Franchisor
While the franchisor should be open with you about what you can expect as a franchisee, do not expect to receive any proprietary information (i.e. information contained in the Operations Manual) until you sign a franchise agreement.
3. Initial Investment
Reasonable: Obtaining an Accurate Estimate of the True Cost to Open a Franchise
By reviewing Item 7 of the Franchise Disclosure Document (FDD), speaking with the franchisor’s representatives and current and former franchisees, and conducting your own independent financial analysis, you should be able to obtain an accurate estimate of the true cost of opening a franchise.
Unreasonable: Coming in Below the Low-End Estimate
When you look at Item 7, you will see high-end and low-end estimates. In most cases, prospective franchisees need to be prepared to be on the high end of the range.
4. Ongoing Fees
Reasonable: Preventing Royalty and Ad Fund Increases at the Time of Renewal
When negotiating your franchise agreement, reducing your initial royalty is unlikely; however, you may be able to negotiate a provision that preserves your current royalty rate at the time of renewal.
Unreasonable: Expecting Leniency on Royalty and Ad Fund Payment Obligations
If you fall behind on royalty and ad fund payments, however, do not expect leniency from the franchisor. Collecting royalties is how franchisors make money; and, if your franchise is underperforming, it may be in your franchisor’s best interests to replace you.
5. Franchise Territory
Reasonable: Securing Territorial Protections for Your Franchise
Most (but not all) franchisors offer their franchisees at least some level of territorial protection. When reviewing your franchise agreement, it will be important to ensure that you have a clear understanding of your territorial rights.
Unreasonable: Expecting to Receive a Truly “Exclusive” Territory
However, franchisors rarely offer franchisees territories that are truly “exclusive.” At a minimum, most franchisors will reserve the right to sell in their franchisees’ territories through “alternate chains of distribution.”
Request a Flat-Fee Franchise Business Review
If you are thinking about buying a franchise, our firm offers four flat-fee franchise business review packages for prospective franchisees. To learn more in a free and confidential initial consultation with franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or contact us online today.
