Negotiating Franchise Relationships

Entering into a franchise agreement binds your relationship with the franchisor. It’s important to ensure the agreement addresses your requirements without jeopardizing future relationships with the franchisor. While it seems, in business, you would want the best position or outcome in any deal. In the realm of Franchises, that is not the case. Quite often its the opposite.

Positive relationships are the strength of any franchise system. When you are building a working relationship with a franchisor, its important to know the boundaries of negotiations. Staying within the lines will help build a strong relationship that will benefit you both for years.

One key area to avoid while negotiating the franchise agreement is offering to pay a lower royalty. While this seems to be the obvious area to “negotiate,” it is actually the least likely to succeed. The simple reason is that the royalty is what sets the standard in the franchise system. All owners in the system have to adhere to standards. It is the standard that creates the strength of franchising. You wouldn’t want to find out at a meeting of franchisees that you are paying double the royalties of someone else because you didn’t do a good job of negotiating. That would not play out well with franchisee harmony. To keep the peace, and the strength, most franchisors are less willing to change the royalty payment.

But don’t give up hope, there may be some areas of flexibility in the franchise agreement. These negotiable points are generally areas that would not be considered disruptive to the franchise system. They can include:

1. Delayed royalty payments. Requesting a royalty payment start date beyond the original opening date. This allows you to capture sales and build your cash position before expensing out royalties.

2. Flexible terms for franchise fee. Negotiating a deferred payment for the franchise fee will help lower cash needed for start-up. Franchisors that stand behind their systems by allowing new franchisees to make partial payments for franchise fee and installments once revenues begin.

3. Training and support. Requesting training for additional or extending the training period. Franchisors need well-trained people to allow their system to succeed. By providing additional support is a benefit to all.

Remember you are building a long-term relationship that needs to be formed on a foundation of trust and respect. Negotiate wisely and understand the other side of the deal.

As always, seek the assistance of a qualified franchise attorney in all matters concerning agreements and contracts. Also, franchise consultants can offer you direction during your search process.