“We do not negotiate our franchise agreement.”
Prospective franchisees hear that sentence all the time. It can make hiring a franchise attorney seem pointless. If the franchisor will not change the agreement, why pay a lawyer to review it?
Because changing the agreement is only one purpose of a franchise agreement review.
A thorough review can identify risks, clarify obligations, help you evaluate the economics of the opportunity, and create a written record of important representations. Even when the franchisor refuses every requested change, the review can help you make a deliberate business decision instead of discovering a serious problem after you have signed the agreement and invested substantial money.
Link to A Real Example Involving Future Royalties A Real Example Involving Future Royalties
We recently represented a prospective multi unit franchisee whose agreement contained a significant future damages provision. If the franchise agreement were terminated before the end of its term, the provision could require the franchisee to pay royalties the franchisor expected to receive for the remaining years of the agreement.
This type of provision can create substantial exposure. Imagine a franchisee signs a ten year agreement, the business struggles, and the agreement is terminated after three years. Depending on the language, the franchisor could claim years of future royalties even though the franchisee is no longer operating the business or receiving any benefit from the franchise system.
We recommended that the provision be eliminated. If the franchisor would not eliminate it, we proposed substantially limiting it, such as capping future royalty damages at two years. That would not remove the risk, but it would make the potential exposure more predictable and manageable.
The franchisor refused to negotiate the provision.
That was not the result we wanted. But it did not make the review meaningless.
The client now understood the risk before signing. The client could consider that risk as part of the larger investment decision, including the strength of the brand, the required capital, the expected return, the development schedule, and the obligations associated with opening multiple locations.
The franchisor also stated in an email that it had never enforced the future damages provision. That statement was not as valuable as deleting or revising the provision in the agreement. The signed contract still contained the language, and franchise agreements commonly include integration and nonreliance provisions designed to make the written agreement controlling. Still, obtaining the statement in writing was better than relying on a verbal assurance that might later be forgotten, disputed, or attributed to a former salesperson.
If a future dispute ever arises, the email may provide useful context and potential leverage. Its precise legal significance would depend on the facts, the contract language, the applicable law, and the circumstances of the dispute. No franchisee should assume an email automatically overrides the agreement. But a contemporaneous written statement from the franchisor is more useful than an undocumented conversation.
Of course, everyone involved hopes the provision never comes into play.
Link to A Franchise Review Serves More Than One Purpose A Franchise Review Serves More Than One Purpose
Negotiating better language is an important part of a franchise review, but it is not the only part. A good review should help a prospective franchisee answer at least four questions.
Link to 1. What are the most significant risks? 1. What are the most significant risks?
Franchise agreements contain dozens of obligations, but not every provision carries the same importance. An experienced franchise attorney should help distinguish routine requirements from terms that could materially affect the investment.
Those issues may include personal guaranties, future royalties, mandatory remodeling, transfer restrictions, territorial rights, termination standards, post termination noncompetition provisions, required purchases, dispute resolution procedures, and the franchisor’s ability to change system standards.
The goal is not to frighten the prospective franchisee with every unfavorable sentence. Most franchise agreements are written heavily in favor of the franchisor. The goal is to identify the provisions most likely to affect the franchisee’s money, operations, flexibility, and exit options.
Link to 2. What should we ask the franchisor to change? 2. What should we ask the franchisor to change?
Some franchisors negotiate more than others. The willingness to negotiate may depend on the maturity of the system, the number of units involved, the experience of the franchisee, the strength of the proposed territory, and the franchisor’s desire to complete the deal.
A prospective multi unit franchisee may have more leverage than someone purchasing a single location. But leverage should never be assumed. Even sophisticated franchisees and experienced operators are sometimes told that the agreement is nonnegotiable.
The franchisee should still make reasonable, focused requests. The franchisor’s response provides useful information. It shows which issues are truly fixed, where the franchisor has flexibility, and how the franchisor responds when a prospective franchisee raises a legitimate business concern.
Link to 3. What can we clarify or document? 3. What can we clarify or document?
Sometimes the most valuable result is not an amendment. It is a written clarification.
Suppose the franchisor says a broad contract provision is intended to address only an unusual situation. Ask the franchisor to explain that position in writing. If the franchisor says it has never enforced a provision, ask for written confirmation. If the franchise salesperson describes a particular territory, opening schedule, or operational accommodation, make sure the description matches the agreement or is otherwise properly documented.
Written clarification is not a substitute for revised contract language. It may not overcome an integration clause, and it may not bind future management. But it can expose inconsistencies before signing and create a record of what the franchisee was told during the sales process.
It can also force everyone to slow down and answer the same question: If this is truly how the franchisor intends to operate, why is it unwilling to state that clearly?
Link to 4. Is the remaining risk acceptable? 4. Is the remaining risk acceptable?
Legal review does not eliminate business risk. It helps the client decide whether the potential reward justifies the risk that remains.
That decision belongs to the client. One franchisee may accept a future royalties provision because the brand is strong, the unit economics are compelling, and the franchisee has confidence in the operating model. Another may conclude that the same provision creates too much downside exposure.
Neither decision is automatically right or wrong. The important point is that the decision should be informed.
Link to “Standard” Does Not Mean Harmless “Standard” Does Not Mean Harmless
Franchisors frequently explain that a provision is standard or appears in every franchise agreement. That may be true. It does not answer whether the provision creates a material risk for this particular franchisee.
A personal guaranty may be standard, but it still places personal assets at risk. A remodeling requirement may be standard, but it can still require a major capital investment late in the term. A future royalties provision may be standard, but it can still increase the cost of a failed location or an early exit.
The right question is not simply whether the language is common. The right question is what the language could mean for the franchisee under realistic circumstances.
This is particularly important for a multi unit commitment. A risk that may be manageable for one location can become much larger when repeated across several franchise agreements or combined with a development agreement requiring additional locations to open on a fixed schedule.
Link to The Review Can Also Reveal Something About the Relationship The Review Can Also Reveal Something About the Relationship
The negotiation process provides an early look at how the franchisor communicates and handles reasonable concerns.
A franchisor has every right to protect consistency within its system. Uniform agreements can make system administration easier and help the franchisor avoid granting conflicting rights to different franchisees. A refusal to negotiate does not necessarily mean the franchisor will be a poor business partner.
But the manner in which the franchisor responds still matters. Does it explain its position? Does it answer questions directly? Does it provide meaningful information, or merely repeat that the agreement is standard? Is it willing to document assurances made during the sales process?
Those interactions may offer a preview of the relationship after the franchise fee has been paid and the agreement has been signed.
Link to Informed Consent Is a Valuable Result Informed Consent Is a Valuable Result
Prospective franchisees sometimes measure the value of a legal review by counting the number of contract changes obtained. That is too narrow a measure.
A successful review may result in negotiated protections. It may uncover a dealbreaker. It may confirm that the client understands and accepts the risks. It may also produce written clarification that could become important later.
In our client’s situation, the franchisor would not eliminate or limit the future royalties provision. The client did not receive the contractual protection we requested. But the client understood the potential exposure, considered it before moving forward, and obtained the franchisor’s written statement that the provision had never been enforced.
That is not a perfect outcome. It is still far better than learning about the provision for the first time in a termination notice or demand letter.
The purpose of a franchise agreement review is not simply to mark up a contract. It is to help the prospective franchisee understand the deal, improve it where possible, document important representations, and decide with open eyes whether to proceed.
Even when the franchisor says no, those protections still matter.
ABOUT THE AUTHOR
Rush Nigut is a franchise attorney with more than 30 years of experience representing franchisees, franchise buyers, and business owners. He helps prospective franchisees evaluate Franchise Disclosure Documents (FDDs), negotiate franchise agreements, and protect their investment before they sign. His mission at Rush on Business is to help entrepreneurs make smarter franchise decisions through practical legal and business insights.