Never rush to sign unless you’re satisfied you’ve negotiated the best deal. When it comes to franchising and leasing, the documents you sign will govern your business dealings for many years to come. There’s a very limited ability to renegotiate in the future.
Where to start
After you’ve identified a promising franchise opportunity, there’ll be many discussions with the franchisor’s representatives. If you’re new to franchising, don’t be afraid to ask questions to gauge what’s up for negotiation. Approach your accountant and lawyer during these early stages – a professional advisor experienced in franchising can offer a wealth of experience towards what’s negotiable and where to start.
How to tackle the franchise agreement
Once the big-ticket items are agreed with the franchisor, they’ll provide your draft franchise agreement. Don’t wait until this point to start negotiating. Some key things to focus on when beginning your discussions with the franchisor include:
There’ll be an initial franchise fee payable to the franchisor for the grant of the franchise, initial training, opening support and sometimes provision of equipment/stock. Start by asking exactly what you get from this fee. If you don’t think you’re getting the best value, then push for more to be included. For example, a franchisor-representative attending your business for a few days during your first days of operations to give assistance in starting up the business.
It’s standard to pay the franchisor’s legal costs of preparing the franchise agreement. You’ll save an additional expense if you can get the franchisor to waive these, or for the costs to be covered by your initial franchise fee.
Sometimes there’ll be no ongoing royalties or franchise fees for your first few months of operations, or a reduction during this time. This gives you the opportunity to establish your business and customer base before paying fees at full rates. If this concession is offered, try to increase its duration. If it’s not offered, push for one.
Generally, you’ll either have an exclusive or non-exclusive territory (or a mix) where you operate/market your business. Exclusivity means the franchisor won’t grant another franchisee the right to, or won’t themselves, operate within your territory. Always aim for the largest territory and as much exclusivity as possible. This reduces the risk of competition from within the franchise system itself. However, be mindful how a larger territory may interplay with minimum performance criteria under the franchise agreement (criteria may be based on territory size or population).
If you want the option to expand in the future, you can ask for a right of first refusal. If the franchisor wishes to franchise a neighbouring area, they’ll then need to offer it for sale to you first.
Franchisors often have minimum performance criteria to be met. Work with your accountant to ensure these are achievable – consider the time it will take to establish your business. If not reasonable, then negotiate. Ensure that the consequences for failing to achieve the criteria are reasonable and constructive. If the franchisor can force you to sell your business, change it to say you must develop and adhere to a special business plan.
Ensure the length of the franchise is suitable with a reasonable number of options to renew. A franchise that’s too short may not give you enough time to recoup your initial investment costs (before you’re faced with having to pay a renewal fee), but one that’s too long may leave you locked into a contractual relationship (not ideal if your business isn’t unsuccessful). When it comes to renewal options, ensure the criteria for renewal are reasonable and achievable.
These are just a few examples of common things a franchisee can negotiate. There can be many others depending on the franchise. Get a written commitment about anything you negotiate.
When you receive your franchise agreement, nothing prevents you from requesting further changes. However, be mindful that franchisors are generally reluctant to amend their standard agreement. Work with your lawyer to determine what’s worth requesting, and what’s worth accepting. There can be many instances where the franchise agreement will say something, but in fact, the Franchising Code of Conduct or another law override what the agreement says – if you already have that legal right you don’t need to request that change.
What happens with the lease
Larger franchisors sometimes handle the process of securing and negotiating your lease. You should ask from the outset what involvement your franchisor will have and if you’ll pay for this service. Franchisors who offer this and who have existing relationships with landlords can be an invaluable resource as they’ll know what you’ll need and what they can achieve. However, always obtain your own independent advice.
The franchisor’s involvement may be influenced by who’ll hold the lease. If the lease will be in your name, they may hold less interest, but if it’s in their name (and you’ll get a licence to occupy the premises) they’ll want greater control over the lease.
Be mindful that larger landlords (such as shopping centres), will be less willing to negotiate, but leases are always up for negotiation (more so than a franchise agreement). Remember again that the law implies certain provisions into leases, meaning that despite what the lease says about something, the law may override that. Extra caution is needed if the lease isn’t governed by retail leasing legislation. Your lawyer can advise you on what’s appropriate to negotiate.
Landlords often offer incentives such as rent-free periods or fitout contributions which can be negotiated for your circumstances. An essential thing to ensure is that the dates, term and options, as well as timeframes to renew under the lease, match those under your franchise agreement. You don’t want the time on your lease to expire but still have a franchise agreement on foot, or vice versa.
Always remember that if you don’t ask for something, you’ll never know if you’ll get it. We’re often surprised at the amazing deals franchisees can negotiate which really put them ahead of their competitors. A little forethought and planning in consultation with your professional advisors can help you secure a franchise agreement and lease for a successful business.
By Luke McKavanagh, Stone Group Lawyers
Luke is a regular contributor to online and print media for Inside Franchise Business. This article was previously published on pages 114 to 117 of the May/July 2019 print edition of the Inside Franchise Business magazine. View an online copy of the magazine here: https://issuu.com/franchisebusiness/docs/ifb0519-digital