Are Franchise Agreements Negotiable?

by Jaburg Wilk

In theory, yes, franchise agreements are negotiable.  In practice, they may not be negotiable – particularly in ways that are meaningful.

Every franchisor has a form of franchise agreement that defines the rights and obligations of the franchisor and the franchisee.  Or should I say, defines the rights of the franchisor and the obligations of the franchisee?  The franchise agreement is an exhibit to the Franchise Disclosure Document (the “FDD”) that the franchisor is generally required to give to each prospective franchisee so that he or she can make an informed decision as to whether to purchase a franchise.

Although franchisees may be under the impression that franchisors are not legally permitted to negotiate and modify franchise agreements, and some franchisors encourage that impression, that is not true.  Franchisors may legally negotiate and modify franchise agreements.  However, a franchisor may be required to comply with certain legal requirements if it agrees to modify the franchise agreement for a particular franchisee. Whether a franchisor needs to comply with those legal requirements depends upon, among other things, the nature of the modification and the state in which the franchisor or the franchisee is located or the franchised business will be conducted.  If required to comply with those legal requirements, a franchisor may refuse to engage in negotiations and agree to modifications.  For example, if a franchisor sells a franchise to be operated in California, the franchisor may be required to file a Notice of Negotiated Sale with the California Department of Business Oversight, amend the FDD to disclose that the franchise agreement has been negotiated within the past 12 months and deliver to prospective franchisees copies of all Notices of Negotiated Sale filed with California during the last 12 months.  In addition, Hawaii, Illinois, Indiana, Minnesota and Washington state laws prohibit discriminatory treatment among franchisees; under certain circumstances, differences can constitute discriminatory treatment.

In addition, certain changes requested by franchisees go to the heart of the system and, therefore, should be denied.  For example, a franchisee requesting that McDonald’s® modify its franchise agreement to permit the franchisee to sell hot dogs would undermine the consistency of the McDonald’s® franchise system.  Other requested changes would be unduly burdensome to the franchisor and the franchise system and, therefore, should be denied.  For example, although it is arguably unfair for franchisors to require franchisees to blindly agree to franchisors’ unilateral changes to the franchise system (such as expanding product offerings), it is impractical to require franchisors to obtain each franchisee’s approval of such changes before implementing them.  Therefore, a franchisee’s request for such approval should be denied.

Provisions that may be open to negotiation and modification include a reduction of the franchise fee or the royalty rate for an initial period, a larger exclusive or protected territory, a later drop dead date for opening the business or a smaller restricted area in the franchisee’s restrictive covenant upon termination.  A start-up or young franchisor is more likely to negotiate certain provisions than a mature franchisor is.  That fact is an obviously result of the start-up franchisor’s desire to get some traction in its brand and its franchise system and the mature franchisor’s greater leverage.

The franchise agreement is a legally binding document that will govern the long-term relationship between the franchisor and franchisee.  It is important for a franchisee to review and understand the franchise agreement, with the assistance of an attorney who specializes in franchise law and knows what is typical, what is unique and what might be subject to negotiation.  It is similarly important to make sure that any negotiated modifications are accurately and clearly reflected in an addendum to the franchise agreement in a manner that does not conflict with other franchise agreement provisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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