New and emerging franchise systems are often very eager to sign those first franchisees. All too often, they are willing to make concessions to get the franchisees on board, despite their franchise attorney’s recommendation against negotiating terms in the standard form of franchise agreement.  If your new franchise system client is determined to make accommodations to its first prospects, then we suggest considering the following:

  1. Draft a Clear and Concise Addendum to the Franchise Agreement.  If a franchise system client is willing to negotiate changes to the form agreements, then any changes should be placed in a simple addendum or amendment to the franchise agreement.  Franchisors should never be reviewing mark-ups or redlines to the agreements as it is: (a) time intensive and administratively burdensome; (b) subject to mistake, ambiguity and the creation of franchisor internal document management issues; and (c) opens a pandoras box and may set a precedent for future concessions.
  2. Stick to Negotiating Business Points – Not Legal Points. Focus on making accommodations that do not hamstring the growth of a new franchise system.  For example, providing (a) a grace period if the franchise does not open within the designated time period, (b) longer phase-in of minimum royalty requirements, (c) a waiver of a required advertising fund contribution until the franchise system has a minimum number of franchise units open and operating, and (d) very narrowly drafted rights of first refusal, may provide some additional flexibility and security to prospects entering a system in its infant stages.  However, franchisees should never be granted any rights to deviate from system standards necessary to protect the brand goodwill and ensure uniformity. Franchisors should also avoid waiving any enforcement rights or remedies.  Remind your start-up brands to discuss any deals with their attorney BEFORE making promises.  Something that may appear reasonable now may have long-term implications to the future growth of the brand.  
  3. Require Confidentiality.  To the extent permitted by law, the franchisee should be required to keep the terms of the addendum or amendment strictly confidential.  Any addendum or amendment should always contain its own confidentiality requirement in favor of the franchise system or, at a minimum, ensure that the franchise agreement non-disclosure restrictions are incorporated by reference so the franchisee cannot publicize its special deal.   Note below in California that the negotiated changes must be reported.
  4. Ensure the Concessions are Non-Transferrable.  A franchise system may be willing to make accommodations for the first prospects taking a chance on a start-up system, but the same circumstances would not apply in the case of a successor owner or operator.  Any preferential terms should be deemed non-transferrable upon assignment or transfer of the franchise unit or upon renewal.
  5. Educate (again) the Franchisor California Rules Regarding Disclosure of Negotiated Terms. New franchise systems may not be considering that certain deviations from the terms offered in a franchise disclosure document may require disclosure in future FDDs. For example, if a franchisor does not uniformly charge fees to franchisees, then it must typically explain the circumstances of those variations in the following year FDD.  Further, California requires the filing with their department of negotiated terms in franchise sales within their state and the disclosure of these terms to California prospects.   Make sure your clients understand when special deals cannot remain secret.

Negotiating with those initial franchisees – especially when those franchisees are friends and family – may be unavoidable during the infancy stages of a new franchise system. However, emerging franchisors should be sure to proceed with caution so ensure it does not create long-term negative implications for the system and brand.