Franchise Negotiation Considerations

By Travis Townsend Jr.

The wild world of entrepreneurship is a high risk, high reward realm in which to play. Those who step into the rocky waters of self-employment and business building turn in the security of steady and predictable compensation for the unpredictable ebb and flow of eating what they kill. A total lack of control over policy and business approach is exchanged for complete control over management, administrative duties, marketing and every other aspect of business operations. Indeed it takes a special kind of person to go out on a limb and attempt to start a business from scratch. For those quasi-special people who are brave enough to undertake running a business, but do not quite want to start one from scratch, franchising is a great option.

Operating a franchise is a good idea for the more risk-averse entrepreneur because franchises have proven systems that are articulated clearly and definitively in a franchise manual, and typically entail support from the franchisor to help make the business successful. I know, I know … that sounds like the franchisor sales pitch doesn’t it? Well, I will temper my exuberance with a sampling of the legal issues a franchisee should consider when embarking upon a franchise venture – or otherwise find oppression from a new boss in the form of a franchisor.

Franchises typically entail licensing intellectual property from the franchisor, with that intellectual property being the basis upon which the franchisee will conduct its business. Therefore it is important to ensure you are licensing everything you will need to start up, operate and grow your franchise. Some unsuspecting franchisees find that after entering into a franchise agreement, they do not have the right to use certain valuable intellectual property owned by the franchisor that is useful, and in some cases necessary, to achieve the full profit potential of the franchise. When negotiating a franchise agreement, make sure you receive the right to use all names, trademarks, systems, processes, and other intellectual property you anticipate using to implement the franchise. If you don’t, you may be required to pay additional fees just conduct basic actions required to succeed in your franchise enterprise.

Franchisors often times upgrade their brand images, logos, facility standards, etc. When they do, they require their franchisees to incur costs to implement changes at their franchise location consistent with these changes. The costs associated with these changes can be very extensive, and unexpected. The best way to limit these costs is to establish a cap for the expenditures required to be undertaken in connection with such upgrades in the franchise agreement during initial negotiations. Moreover, include a reasonable notice provision requiring the franchisor to give you a sufficient amount of time to implement the changes. This will afford you the opportunity to budget and plan for the expense as the requirement comes down from the franchisor.

Another big matter to address in managing a franchise is the opportunity to be rewarded for the business you build. Franchisors love to horn in on a franchisee’s sale of the franchise. They will require a payment in connection with any sale of the franchise, usually some percentage of the sale price. This is sometimes in addition to a franchise fee that must be paid by the new franchisee; basically allowing the franchisor to double dip. While negotiating this provision away is usually contentious, it will make your franchise more marketable as you seek to exit and cash out down the road, and is worth the effort.

Franchising is a nice middle-of-the-road approach to entrepreneurship, but to get that real feeling of controlling your own destiny, fight hard to keep the strong arm of the franchisor from around your neck.

 

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