The Fox Rothschild team of 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.” A summary of this presentation is being presented in four separate blog posts. The first post focused on the central theme of franchise negotiation from the perspective of the franchisor and franchisee.
This installment highlights a few practice pointers that can save time and money during the negotiation process and protect the confidentiality of your negotiations. Installments three and four will examine the top ten things never to negotiate in in detail, including typical franchisee requests, franchisor counter-arguments, and common compromises.
When negotiating a franchise agreement, the franchisee should provide a memorandum of the terms he or she proposes to revise. This can take many forms, from a formal letter of intent to an informal email. The level of detail will vary, but at a minimum it should cover all of the franchisee’s requests and be thorough enough for the parties to begin negotiations and understand what they are agreeing to. This process focuses the parties on the most impactful terms and identifies potential deal breakers early in the process, saving time and money.
Once the negotiated terms are established, we suggest that they should preferably be included in an addendum to the franchise agreement, which will be attached to the franchisor’s standard form of franchise agreement. We strongly encourage you to avoid revising the standard franchise agreement. There are a few reasons for this. First, it is generally easier and faster to draft and negotiate an addendum rather than redline the entire franchise agreement. Second, sticking to an addendum will keep revisions focused and precise. The franchisee’s attorney is likely to make more changes if he or she has the opportunity to redline the entire franchise agreement. Finally, when you need to review the negotiated terms of multiple franchise agreements, short addendums will be easier to review than redlined franchise agreements.
Finally, be sure to protect the confidentiality of your negotiations – but don’t go overboard. Franchisees will talk to each other, which can be both good and bad. You want your star franchisees to speak with new and prospective franchisees. They’re in a great position to give advice that will boost performance, and to be a cheerleader for your system. However, avoid permitting them to share negotiated terms, which can hurt morale and give new franchisees unreasonable expectations. For example, original or early franchisees may have obtain concessions that were appropriate for a startup system may no longer be appropriate at later stages of the brand’s development. Moreover, you must be sure to understand the franchise laws of the states where you are offering franchises, which may require you to disclose negotiated terms in certain cases as briefly mentioned in our first post. Also, as you probably know, disclosures and representations respecting financial performance are fraught with danger and should never be made by franchisees.
Your addendum should include a confidentiality provision that balances these considerations. The negotiated terms, and the fact that you negotiated your franchise agreement, should be protected from disclosure. After all, those are private terms between two business partners. However, franchisors shouldn’t be so specific as to prevent franchisees from communicating in ways that benefit all members of the system.
In the next installment, we’ll launch into the first 5 of our top 10 provisions to “never” negotiate:
1. Signing the “then-current” franchise agreement
2. Reservation of Rights
3. Right of First Refusal
4. Marketing Fund