Myth: It is Illegal for a Franchisor to Negotiate and Modify the Terms of its Franchise Agreement?
.jpg)
In certain "franchise sales settings" franchisees are sometimes led to believe that modifications cannot be legally made to their franchise agreement. That is, to induce a franchisee to sign the franchise agreement - without the benefit of any negotiations or review by a franchise attorney - the franchisee is led to believe that the franchise agreement is a "standard agreement" (signed by everyone) and that legally the franchisor is not allowed to make any changes. The implication: you might as well just sign the agreement and not waste time or money since "we can't change the franchise agreement even if we wanted to".
Sadly this misstatement / "myth" leads to a false sense of security and sometimes some big mistakes by prospective franchisees. To be clear:
- Franchise agreements are negotiable;
- It is not illegal for a franchisor to modify its franchise agreement; and
- It is extremely common for franchisees to negotiate certain aspects of the franchise agreement.
Understanding these facts keep in mind that the extent to which a franchisor may be willing to negotiate the terms of its agreement varies depending on the negotiating power of the parties - one major factor includes the financial resources of the franchisee. Also, certain core provisions of a franchise agreement - such as the royalty rate, methods of operation and use of proprietary products - usually are not and should not be subject to change.
Some of the critically important franchise agreement terms that you should be evaluating and potentially negotiating, include:
- Scope of your protected territory;
- Grace periods regarding the commencement of royalty obligations;
- Liquidated damages and liability for early termination;
- Renewal rights;
- Transfer rights;
- Cure periods for alleged defaults; and
- Potential "rights of first refusal".
Depending on your circumstances and concerns there are many other issues that, as a prospective franchisee, you should be considering. However, it is critical that, as a prospective franchisee, you recognize that you have the "right" to negotiate the terms of your franchise agreement. This "right" must be taken seriously.
You can get an idea of what types of franchise agreements have been changed by looking at Caleasi, and search under Negotiated Sales.
The Caleasi site is here:
http://134.186.208.228/caleasi/
Michael thanks for the great point. The url may not have come through in the comment but Mr. Webster is referring to the online searchable database of the California Department of Corporations. This site maintains a database of all franchise filings in the State of California. When conducting a search on this database under the section titled "Package Names" you can select "Negotiated Sales" and conduct a search. The following link is to The Department of Corporations searchable database.
http://www.corp.ca.gov/CalEASI/caleasi.asp
Thanks again Michael.
- Charles
While it may be true that franchise agreements may be legally negotiated with the franchisor by individual prospective franchisees, isn't it true that most of the mature franchisors don't or won't negotiate changes and will acknowledge that pre-sale, their contracts are not negotiable. Don't they acknowledge this to the courts, when asked?
Aren't these franchisors who don't and won't negotiate the terms of their offering circulars engaged in some kind of deception when these adhesory contracts are signed by good faith franchisees who may not read a non-negotiable contract because they believe it is not negotiable --and why bother?
The prospective franchisees have already been induced to buy the franchise by all the pre-sale hype and the "implied earning claims" - i.e. the estimated start-up costs and time frames provided by the franchisors. The estimated start-up costs and time frames do not have to be substantiated by any facts in disclosure and are often very misleading, aren't they?
Don't most mature and successful franchisors offer their franchises in the pre-sale process to new buyers as defined by the Franchise Disclosure Document and the franchise agreement as a take-it-or-leave-it proposition?
Don't most prospective franchisees believe that all of their fellow franchisees will stand in the same relationship with the franchisor?