Up for negotiation: getting what you want from a franchise agreement

Entrepreneur, Sept, 1998 by Andrew A. Caffey

The time to sign a franchise agreement comes at the end of a lengthy process, highlighted by the delivery of a Uniform Franchise Offering Circular (UFOC), promotional brochures and other system literature, as well as personal interviews. Negotiating the terms of the contract may be the last thing on your mind as you near the moment of commitment. With some advanced planning and a thorough understanding of the franchisor's position, however, you can go a long way toward equalizing a contractual relationship that traditionally leans heavily in favor of the franchisor.

The reason franchise agreements have always been weighted in the franchisor's favor is simple: The franchisor is not only your partner in this venture but also the systemwide regulator. It's in everyone's best interest - the franchisor's, yours and that of other franchisees - to have all franchisees operate in a manner that meets the highest standards.

In a retail system, for instance, all stores must be clean and well-run. If the store closest to you is dirty, rundown or has slow service, it will affect your business dramatically. Because both units operate under the same trademark, if your neighbor is injuring the local reputation of the mark, you'll pay the price. Customers who have visited the neighboring store will naturally assume your store is in the same condition and provides the same poor service - and they'll keep a safe distance from your establishment.

For this reason, franchisors must set forth seemingly Draconian enforcement rights in their franchise agreements. Although the enforcement provisions may appear overbearing, they're designed to allow franchisors to take action if a franchisee's operation is sub-par. These provisions protect you as well. When your neighbor's careless operation starts to hurt your business, you'll be the first one to request that the franchisor do something to correct the situation. The franchisor must have tough enforcement provisions in the franchise agreement, or it's powerless to do anything.

THE UPPER HAND

No matter how badly you may want to own a franchise, franchisors want you even more. It's difficult, time-consuming and expensive for a franchisor to locate a qualified franchisee. Most franchisors spend tens of thousands of dollars a year recruiting franchisees, and once a qualified applicant shows interest, the franchisor is highly motivated to complete the sale. Franchise sales representatives are often paid on commission. They're extremely motivated to see the transaction close; if you walk away, they lose money.

What does all this mean for you? Power. As a potential franchisee, you're in a position of considerable strength when negotiating a franchise agreement. And you can use that power to your advantage.

Steven B. Wiley, president of The Wiley Group in Littlestown, Pennsylvania, a company that instructs corporate representatives on partnership building and sales, leadership, and negotiation techniques, offers some suggestions. "Talk to other franchisees to find out where the company has shown flexibility in the past, talk to an experienced franchise lawyer and ask the franchisor for as much background information as you can," says Wiley. "When you meet with the company to discuss the terms of the franchise agreement, you want to know as much as you can about the contract. You need to be prepared, so you're not thrown off balance when the give-and-take starts."

Don't accept everything the franchisor offers. It's in the best interests of both you and the franchisor to make sure both parties are happy with the deal and comfortable with any agreed-upon contract changes. If you aren't happy with some aspect of the contract, or there's a provision you don't understand, speak up immediately.

According to Wiley, the number-one negotiating principle to keep in mind is to start high. "I teach corporate managers to start with an aggressive opening position - not to encourage greed, but so they can make concessions along the way and work toward their target position," he says. If you open at what you consider to be a fair position, you'll have no room to maneuver when the other side asks you for [a concession]."

And be prepared to walk away from the deal. "This is a negotiator's real strength," says Wiley. "Your neutral attitude says to the other side that you're not overly eager to conclude the deal, that you want the deal but only if it's on reasonable terms. Even if you think it's the opportunity of a lifetime, never show that to the other side - or the deal won't end on your terms."

RELATED ARTICLE: Ties That Bind

Some parts of a franchise agreement just aren't negotiable.

What provisions of the franchise agreement usually can't be negotiated? Here are a few areas where franchisors can be expected to dig in their heels:

* Trademarks. As the trademark owner, a franchisor will not be willing to water down its legal right to control the display of the mark or the company's right to protect the mark through enforcement actions. There's usually some wiggle room in the degree to which a franchisor is willing to stand behind the mark if the franchisee is legally attacked for its use. Look for terms in the contract that show the franchisor pays the legal expenses incurred by a franchisee who has to defend himself or herself against a claim of trademark infringement.