We, Megan Center and Alex Radus, recently gave a presentation at the International Franchise Expo in New York City on the “Top Ten Provisions to ‘Never’ Negotiate in a Franchise Agreement” and want to share the highlights of that presentation here. This first of four blog posts will focus on central themes of franchise negotiation from the perspective of both the franchisor and franchisee.
With that, before we jump into the theme of negotiation, we want to briefly touch on the top ten provisions we will cover over the next few blog posts, which are as follows:
1. “Then-current” form of Franchise Agreement
2. Reservation of Rights
3. Right of First Refusal
4. Marketing Fund
6. Changing Marks/Renovations/Upgrades
7. Termination/Cure Period
10. Personal Guaranty
In each of the blog posts that follow, we will discuss the typical provision in a franchise agreement, the typical request by a franchisee, and how both a franchisee and franchisor may argue for its respective provision or revision.
By way of introduction, we want to briefly touch on why a franchisor may want to, or in certain circumstances be required to, negotiate provisions of its franchise agreement. First, economic factors may contribute to negotiation points. As the economy ebbs and flows, the sales of franchises often will follow. A franchisor may have to grant more concessions in a bad economy, or vice versa, in order to make a franchise sale.
Second, if an emerging brand, a franchisor may need to offer its original franchisees a more incentivized franchise package than an established franchisor would. Similarly, if a franchisor is trying to entice a multi-unit franchisee or a franchisee that has experience in operating other franchised businesses to join its franchise system, a franchisor may have to “sweeten the pot” and offer more concessions than it would a standard-single unit-franchisee.
Additionally, if a franchisor is expanding internationally, similarly to an emerging brand, a new franchisee will be developing the brand in an entirely different country, often with no brand recognition. As such, it may need further incentives to take on this additional obligation.
Lastly, and perhaps most importantly, certain states require that a franchisor amend certain portions of its franchise agreement via a state law addendum. Generally, these changes relate to dispute resolution procedures, governing law, and termination procedures. Further, if you negotiate changes with franchisees in California, you are required to comply with the Negotiated Changes Law in California which mandates disclosure of all material revisions to the franchise documents granted to California franchisees to all California prospects for a year from the closing of the negotiated deal.
The next post in this series will focus on practice pointers if a franchisor chooses to, or is required to, negotiate a franchise agreement.