NEGOTIATING THE FRANCHISE AGREEMENT.
You’ve decided to buy a franchise. You’ve found a franchisor you’re eager to work with. What comes next?
It’s now time to negotiate a franchise agreement which will govern your relationship going forward. This is a critically important step which will take time and effort to do properly. Remember, as a franchisee, you should not feel that you are obligated to accept the franchisor’s terms. Just as you will benefit from using the brand established by the franchisor, so too will the franchisor benefit from the expansion of its business through your efforts. You have the power to negotiate changes in the franchise agreement; don’t be afraid to stand your ground on the key issues.
By law, the franchisor is required to provide disclosure to the franchisee at least 14 days before the earliest of either the signing of the franchise agreement, or the payment of any funds to the franchisor. This disclosure must include: a) all material facts, including all costs that the franchisee will be required to pay in association with the establishment of the franchise;
b) financial statements; and
c) copies of the proposed franchise agreement and any other agreements to be signed by the franchisee. Reviewing and analyzing the disclosure provided is a critical step to ensure that you know what you’re getting into. You should obtain independent legal advice to assist you in this process. However, it is prudent to ensure that the lawyer with whom you consult has an established background in franchise law. It will take time for your lawyer to properly review the disclosure documents provided by the franchisor and you should expect to pay legal fees in accordance with the time it will take for this critical service. This is money well spent as it can help you avoid surprises later on in your relationship with the franchisor which can have very expensive consequences.
So you’ve reviewed the disclosure documents and determine that you still want to move forward with purchasing a franchise. You may then want to negotiate the franchise agreement. Key issues will include: a) What are the terms for renewal of the agreement? Having invested the time and effort to establish a franchise at a particular location, you want to ensure that you have the option to extend the agreement and continue to profit from your efforts. b) Where will any lawsuit that arises between you and franchisor be litigated? For your convenience you should ensure that this will be here in Ontario.
c) How much will you have to pay for merchandize? Often franchisors will insert terms in the franchise agreement requiring the franchisee to purchase merchandize and supplies from a designated supplier. This supplier may be affiliated with the franchisor. If you are required to purchase from a particular supplier, you need to ensure that the prices will be reasonable.
d) How will disputes that may arise between you and the franchisor be resolved? Many agreements state that any disputes are subject to arbitration. This means that disputes will be settled by an independent third party arbitrator, rather than the courts. Although this saves time, it is expensive because, while a judge’s salary is paid by the taxpayers, an arbitrator must be paid by you and the franchisor. You may want to negotiate to remove an arbitration clause from the agreement or request that the franchisor pay the arbitrators fee.
e) How will the advertising fund be administered? You should negotiate for some assurance that advertising dollars will be spent in your area.
f) What obligations will the franchisor have to assist and support you? By law the franchisor is required to act in good faith and to deal fairly with the franchisee. However, it is a good idea to negotiate the specific support the franchisor will provide, particularly if you are especially reliant on the franchisor because your own business experience or financial resources are limited.
g) What territorial protection will you have? You want to ensure that an identical franchise will not open across the street – unless you operate in a population with a high concentration.
These are only a few of the key issues that must be negotiated in the franchise agreement. It’s well worth the time and money to properly review the franchisor’s disclosure and to negotiate a fair and equitable agreement with a lawyer. By doing so, you can avoid much hassle, aggravation and expense in the future.