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Helpful Tips When Drafting or Revising a Franchise Agreement

by Ed Teixeira

New Franchisors as well as existing franchisors may need to consider changes to their franchise agreement. Before any changes are made its important to know what your competitors are doing. In addition, franchisors need to be aware of objections to certain provisions of the current agreement, made by prospective franchisees and their attorneys.

Here are some tips for start -up franchisors that are developing a new franchise program, and existing franchisors in the process of amending their current agreement.

1. Know your competitor's franchise program. Use a spreadsheet to record the key attributes of their franchise agreements: Number of franchisees, investment range, initial fee, royalty fee, advertising fee, franchise term, renewal term, territory, training program, etc. If you feel that your franchise concept is so unique that you don't have direct competitors, consider those franchises that compare from an industry and investment standpoint.

2. For an existing franchisor facing sluggish franchise sales or a new franchisor consider adding some appeal to your franchise, that will provide an advantage over more established competitors. Perhaps your initial franchise fee could be lower, your royalty payment a percent less, a longer initial franchise term or a larger territory. The important point is to have some advantage over your competition that can help you sell franchises. As a start up franchise it’s difficult enough to sell that first franchise without a prospective franchisee comparing you to a more established competitor.

3. Remember, you can always make changes to your franchise agreement and it can go either way. Some franchisors are concerned that if they change certain terms of their franchise agreement that favors current franchisees then new franchisees might get upset. My response is simple: "The first groups of franchisees were the pioneers and as such they were able to obtain more favorable terms than their successors." On the other hand, if you want to make changes that are favorable to new franchisees you will most likely need to amend prior agreements in order to keep the peace. That will depend upon the kinds of changes to be made. Be sure to measure the impact of these changes from a financial standpoint.

4. Balance the salability of your franchise with the contractual protections you require. There is a fine line between a franchise agreement that will not turn off prospective franchisees and their attorneys versus the desire of the franchisor and franchise counsel to be well protected. The term used by attorneys is "belt and suspenders" which describes contract language that is very strict and covers every possible contingency.

5. Existing franchisors should look for particular objections that continually come up. Often times the attorney representing a franchise candidate may advise them to simply walk away because of certain provisions in the franchise agreement. Most start-up franchisors make changes to their agreement after their first year, in order to achieve some balance. In some cases, this is done by "softening" certain provisions and even eliminating objectionable language. An experienced franchise attorney in combination with savvy franchisor management can achieve the proper balance to their franchise agreement.

Franchisors will need to make periodic changes to their franchise agreement. The degree of these changes will depend upon many factors. Franchisor management needs to communicate their objectives to franchise counsel and seek their advice. When management requests a "tough" franchise agreement, than the role of the franchise attorney is to fulfill that request. If there are objections by franchise candidates and their attorneys don't blame your attorney for doing their job. Franchisors need to guide franchise counsel in fulfilling their role, which is to write an agreement that protects the franchisor, as well as complying with the rules of law and will be generally acceptable.