We often talk to people who were told they could avoid the regulations of franchising if they simply granted a “license,” or entered into a “consulting agreement,” with a person who approaches them about opening a similar business. Be very wary of such advice; in most cases, these are unregistered franchises that can expose you to significant liability. As they say, “if it quacks like a duck…”. Continue Reading Be Careful Licensing Your Business – You May Be Granting a Franchise
All too often start-up franchisors rely on a consultant or attorney to prepare their franchise agreements for them. If they work with an attorney who has extensive experience in preparing these agreements, their reliance may be appropriate, but recent legal actions against some big named franchisors demonstrate the importance of knowing what is in your agreements, and having them reviewed at least annually by someone who keeps up with trends, pronouncements, and changes in the law.
Sometimes a prospective franchisee, after reviewing the form Franchise Agreement and ancillary contracts, may attempt to negotiate with you for concessions or to change the terms to suit their needs. Maybe the prospective franchisee wants a reduced initial or advertising fee or royalty rate, a revised territory that doesn’t squarely fit with how territories are defined in the form Franchise Agreement, or more leeway in the beginning months as the business starts up. In other cases, the prospective franchisee may want to revise their obligations so the franchised business can fit their existing business.
Typically, the decision whether to entertain these negotiations comes down to three issues:
Business or Financial Benefit
You need to determine whether these changes would make business and financial sense for you, as the franchisor. For instance, can you still profit on a sale of a franchise system with a reduced royalty rate or no initial fee?
Most franchisors don’t negotiate with franchisees because doing so would result in disparities in the system between franchisees. Remember that a franchise system is a system—ideally it should be the same for all franchisees. The larger the system is, the harder it often is for a franchisor to give concessions to specific franchisees. However, for startup franchisors, sometimes it may be beneficial for a franchisor to offer concessions to new franchisees for taking a larger risk with an unproven brand and to promote sales of franchises.
Further, a franchisor needs to determine whether it is restricted from making a concession for a particular franchisee. For example, if an existing franchisee was granted an exclusive territory of a certain area around the franchisee’s store, and a prospective franchisee attempts to negotiate for a physical territory or alternative channels of distribution (such as a mobile unit or online) that would encroach on the existing franchisee’s protected territory, the franchisor would be breaching its franchise agreement with the existing franchisee if agreed to the changes requested by the prospective franchisee.
If the franchisor and the franchisee do agree to make certain changes to the form Franchise Agreement and ancillary contracts, the changes must be documented in an amendment or addendum to the signed Franchise Agreement or ancillary contract, as the case may be, so that the “base” Franchise Agreement or ancillary contract remains as-is (i.e., the same as used elsewhere in the system and that is registered and on-file with any applicable states) with the agreed-to changes in a separate amendment or addendum for the applicable franchisee.
Also, offering concessions to a franchisee may require a disclosure in your next Franchise Disclosure Document. For example, if the initial franchise fee charged to franchisees is not uniform across the system, including if previous franchisees may have bargained for lower fees, then the range or a formula used to calculate the initial franchise fee and the factors used to determine the fee must be disclosed in Item 5 of the Franchise Disclosure Document for the past fiscal year.
The Larkin Hoffman Franchise Team can provide recommendations on whether you should accept or should reject any changes or concessions requested by a franchisee.