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Nov, 20 2009

Negotiate into franchise

If you are new in the franchise business, you are bound to have initial hiccups of being a first-time franchise buyer. TFW discusses in detail some of the important clauses that are generally negotiable in a franchise agreement.

If you are new in the franchise business, you are bound to have initial hiccups of being a first-time franchise buyer. TFW discusses in detail some of the important clauses that are generally negotiable in a franchise agreement.

Make a beginning

A franchise agreement is a contract, which is signed by the franchisor (the parent company) and the prospective franchisee for a certain period of time. It is a very critical document, wherein both the franchisor and the franchisee carry certain obligations that are essential to the success of the venture. Before you take any step towards signing the dotted line, it is very crucial for the franchisee to understand each and every aspect of the business he is entering into. After all, it is an agreement, which binds both the franchisor and the franchisee for a number of years. To avoid hiccups at later stage, it is better to read and understand its each and every aspect and discuss it with an experienced franchise attorney. For instance: What would happen if the territory assigned to you is not exclusive and the audits are carried out frequently without any prior information. It’s better to be well-informed about what to discuss and negotiate before taking any final decision.

The most important aspects that strike the franchisees’ mind are: which terms and clauses are usually negotiable? How can a franchise attorney assist in negotiating the franchise agreement with the franchisor? How can you negotiate with the franchisor?

Most of the times, it happens that some franchisees reluctantly sign the agreement without discussing any clause with the franchisor. Don’t fall into that trap. The franchisee must look out for loopholes. Let’s find out the best way to negotiate with the franchisor:

Reading and research

It is imperative that the franchisee does some advance preparation and conduct a thorough research on the franchisor’s position by scrutinising his brand popularity in that specific region, visiting the franchisor’s business and talking to the existing franchisees. He can ask the existing franchisees about their art of negotiating with the franchisor. On the basis of this research, the prospective franchisee must consult legal and financial advisors. Also find out if the franchisor is flexible in negotiating with the franchisees.

Negotiable agreement terms

Before the franchisee comes close to sign up the franchise agreement, it is necessary that the franchisee is at ease with all of its provisions. To achieve this comfort level, the franchisee and the franchise attorney may consider it obligatory for the franchisor to make some changes in the franchise agreement. Most of the times, it happens that some franchisors do not agree on negotiating their franchise agreement at all. In that case, the franchisee must try from his/her end and ask the franchisor to negotiate on certain terms and clauses. Do not agree upon everything that the franchisor offers. In case you are not happy with some aspect of the contract, speak up immediately. An aspiring franchisee must be prepared to walk away from the deal if the agreement only favours the franchisor and not him. The franchisee must go through the copy of the agreement and think about various business aspects. Try to check with the legal advisors. Here’s every negotiable clause, which will help the franchisee while negotiating:

Initial franchise fee: Some franchisors are flexible in reducing the franchise fee with the franchise buyers. N. Subramanian, Country Head, Operations, CADD Centre, elucidates, “At times, we do negotiate on initial investment. For instance, if one-time franchise fee is Rs 20 lakh and if the franchisee says that he will pay Rs 15 lakh, we agree. But generally, we don’t negotiate with the franchisee as the terms and conditions are rigid.”

Puja Nanda, Franchisee, Shahnaz Husain, says, “When I took up the franchise of Shahnaz Husain, I only negotiated on the franchise fee.”

Ashim Gujral, MD, Moti Mahal, says, “The franchise agreement is a legal contract and it carries 150 points. Certainly, we do negotiate with the franchisee on monetary aspects. For instance, if we charge Rs 15 lakh for our restaurant franchise in Bombay, it is quite obvious that in tier II and tier III cities, the initial fee would be lesser than tier I city.”

Subramanian adds, “We provide a copy of franchise agreement to the franchisee in advance and give him sufficient time to go through every point.”

Royalty: Since it is difficult for the first-time franchise buyer to get returns in the first year of operation, the franchisee can either ask the franchisor to reduce the royalty fee to a specified period or can ask for a grace period of few days. Like CADD centre reminds its franchisees three months in advance to deposit the royalty in time.

Area exclusivity: The franchisee can negotiate on the clause of area exclusivity with the franchisor. Always ask for area exclusivity. Samit Lakhotia, Business Head, Re-feel, explains, “We do not negotiate with franchisees on the terms and clauses set in the franchise agreement except for the area exclusivity/restriction clause that we put in the agreement.”

Agreeing to this, N.P. Singh, Director (Retail projects), Samsonite South Asia Private Limited, says, “We do provide area exclusivity to the franchisee.”

Advertising: Sometimes it happens that the franchisee has to bear the cost of advertising and marketing promotions. Make sure that the franchisor should equally contribute to the sum of advertising. Limit on regular audits: Frequency of audits can affect your business. To control regular audits, the franchisee must speak to the franchisor and ask for notifications before conducting any audits. The franchisee can talk to the franchisor to limit the regular audits.

Late fee charges: In franchise agreements, the franchisor has the right to charge late fee on late payment of royalty or any other hidden fees. It is advisable to ask for grace period so that they do not impose late fee.

Term of agreement: Alok Bajpai, Marketing Head, N Power, the hardware and networking training arm of Aptech Ltd, states, “The term of the initial agreement period is also negotiable. The franchisee can sign the agreement for either three or five years.”

He adds that the franchisee can negotiate with the franchisor on the term of the agreement also. If the franchisee is satisfied with the same franchise and he/she is getting good returns on investment, then he/she can also renew the agreement with the franchisor.

Apart from the negotiable clauses, it is important to note that some franchisors do not negotiate with the franchisee on all the provisions in the agreement as other prospective franchisees can also ask for the same changes in their agreement. Emerging franchisors are more flexible in negotiating on certain clauses than established franchisors. The reason being that their brand is not well-known in the market and to popularise their brand name, small franchisors do agree to negotiate on certain clauses. However, recognised brands feel that their one mistake can ruin the brand’s reputation, and hence, they flinch to take any step in this regard.

Bajpai enlightens, “The company does not allow any deviation in what-so-ever manner in any of the clauses pertaining to course delivery, IPR, use of company logo, financial discipline, breach of contract and subsequent termination etc.” Whereas Rod Young, Executive Director, DC Strategy, says, “Consistency in many franchise networks is one of the most fundamental aspects for the success of the franchise business. This also relates to consistency of the terms of the franchise agreement, which in most cases includes the term, payments, franchisee’s obligations, termination and restraints. Depending on the maturity of the network, chances of negotiating any of these terms become more difficult as the franchisor and the franchise network becomes more mature.”

He adds that in most of the franchise deals, the franchisors do not provide any variation in the agreement for the reason that the solitary aim of a franchise agreement is to provide uniformity in the franchise system and every franchisor would expect from franchisees to follow his/her obligations.

Consulting an attorney

Picking up the franchise attorney for reviewing the franchise agreement is always a right move. Make sure that the franchise attorney is familiar with franchise agreements. Franchise attorney plays an important role not only in handling the franchise-related legal issues, but also plays a pivotal role in franchise negotiations. To be on the safer side, it is necessary for the franchisee to involve a franchise lawyer and ask for his advice.

Brian Duckett, Chairman, The Franchising Centre, elucidates, “The lawyer's role is to explain the agreement so that the franchisee knows what he is getting into and can then decide whether to go ahead or not.”

Before signing the deal with the franchisor, it is important that the franchisee discusses each and every clause with the franchise lawyer. The franchisee must select an experienced franchise attorney to review the agreement and negotiate with the franchisor on the franchisee’s behalf and helps in finalising the deal.

Awareness pays

Many people enter into franchising and end up losing the business in the initial months or years. The reason, Indian franchisees are not much aware of the negotiable clauses. They sign the agreement without involving any legal expert, which only leads to termination of the agreement. The prospective franchisees must conduct proper investigation before taking up the franchise.

Since negotiation is the final process, it is pertinent that the franchisee conducts meticulous research, read the copy of the agreement and does not hesitate in asking the franchisor, if any clause is not clear to him.

The franchisee must scrutinise all the facts and try to collect as much information about the franchisor as he can. It is always advisable to be safe rather than being sorry. So, better to do all your advance research in time and minimise the risk of failure.

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