What Items Are Negotiable When Buying A Franchise?

The franchise agreement found at the end of a franchise disclosure document (FDD) is the most important legal document agreed upon by both parties in a franchise sale. It serves as a contract between the franchisor and franchisee, defining their legal relationship and outlining each party’s rights. 

It’s a common myth that franchise candidates aren’t allowed to negotiate the terms of their franchise agreement; on the contrary, there are actually quite a few opportunities for candidates to negotiate with their prospective franchisors to create an agreement that’s advantageous for both parties. 

“With limited exception, franchisees have the right to negotiate every aspect of the franchise agreement and its accompanying documents,” said Evan Goldman, Franchise & Hospitality Attorney and Partner at A.Y. Strauss, LLC. 

A best practice when negotiating the terms of a franchise agreement is to ask for reasonable changes, according to Goldman. “Typically, the types of reasonable changes I ask for include the franchisee’s personal guarantee; the bases for termination (particularly what the renewal or transferee agreement will look like); arbitration clauses; and liquidated damages clauses,” he said. 

Goldman strongly suggested that candidates negotiate termination points with the franchisor. “This area is the one you’re most likely to obtain reasonable changes to and has the most direct impact if it’s drafted too broadly—and it likely is,” Goldman said. “Because if you get terminated for a seemingly avoidable reason, changes to other areas of the agreement—like royalties—are wholly irrelevant.”

Additionally, Goldman advises that candidates feel empowered to ask for what they want. “While [franchise lawyers] understand that some franchisors have a ‘no negotiations’ policy, my experience in representing franchisees is that the vast majority of franchisors do not apply that rule in practice,” he said. “At the end of the day, I almost always recommend the franchisee try to negotiate as much as possible, hoping that they’ll get a fairer deal for all parties. In my experience, the upfront negotiations can reduce each party’s litigiousness later on, and avoid unnecessary (and very costly) disputes from arising.”

However, even though franchise candidates have the right to negotiate pretty much any aspect of their agreements, it’s a bad idea to be unnecessarily aggressive, Goldman warned. “In my experience, this happens often when franchisees hire non-franchise lawyers to assist them; they ask to change the royalties, the marketing budget or something else that the franchisor will not (and usually cannot) negotiate.”

Often, franchise candidates miss the opportunity to negotiate their agreements, resulting in possible disputes between both parties later on. “A fellow franchise attorney once told me that, based on a study conducted, just 26% of all new franchisees hire counsel to assist them through the negotiation process,” Goldman said. “And, I would imagine, just a small percentage of those franchisees hire competent franchise lawyers—this is the biggest missed opportunity. Not hiring a solid, well-rounded ‘franchise lawyer’ can have pretty detrimental effects.”

“The fact of the matter is that franchisors have attorneys looking out for their best interests and franchisees should too,” Goldman said. “It only helps reduce both parties' litigiousness later on. Any pre-agreement discussions should be about the need to have a fair relationship, in which both sides have counselors to rely upon in making well-informed decisions.”