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Busting Myths About Franchise Agreements

24 Aug 2006

The term franchise has evolved from the Middle French “franchir” meaning “to free”. The concept of freedom or flexibility is often overlooked by both franchisors and franchisees in their approach to the franchise agreement, but it is one which characterises the most successful franchise relationships and is a tremendous asset in negotiating and recording every franchise relationship. An emphasis on flexibility from both parties can ensure that the franchise documentation and related negotiations provide not only a legal framework for their long-term interaction but also an opportunity to set a tone of mutual trust and respect.

For most franchisors and franchisees there is a preconception that the franchise agreement is an immutable, static account of the parties’ obligations.  However whilst the traditional approach to franchise agreements has favoured consistency and uniformity, it is increasingly apparent that as the sector evolves and our knowledge of franchising develops, a more sophisticated approach is becoming appropriate. 

Furthermore it has long been the case that the franchise agreement is ordinarily heavily slanted in favour of the franchisor.  Certainly the odds are stacked in favour of the franchisor at the outset in that the business belongs to the franchisor, the franchisor drafts the contract and associated franchising manuals, and the franchisor is perceived to select the franchisee.  In reality however there is much scope for manoeuvre in negotiating the agreement and franchisees should never underestimate the potential leverage they possess.  It is always open to the franchisee to seek to redress the balance in order to achieve the deal that best suits its requirements.

It is in both parties’ interests to devote sufficient time and resources to negotiating and drawing up an accurate agreement but one that is also a meaningful and dynamic instrument that will support the evolution of their relationship over what could be twenty years or more.  An important consideration for both franchisees and franchisors is to recognise that both the legal agreement and the franchisor’s attitude towards it are large elements of the package offered by the franchisor, and ones that the franchisor should be judged upon.  Whilst the franchisee will not be encouraged by an immovable franchisor unwilling to negotiate in any area, a franchisor willing to accede to all requests ought to be viewed by the franchisee with equal suspicion.

From the franchisor’s perspective some degree of uniformity as regards the contract is inevitable in order to avoid accusations of unfair treatment of individual franchisees.  Similarly in order adequately to protect its assets it will be necessary for the franchisor to require key obligations from the franchisee.  This should not preclude an open and flexible attitude from prevailing during discussions regarding the franchise agreement.  As with any commercial negotiation there will be issues on which the franchisor is unable to alter its position, but there should also be areas where a degree of accommodation is possible.  The capital to be gained from such accommodation can vastly outweigh the seeming sacrifice at the negotiating table. 

The franchise agreement and related negotiations should therefore not be perceived as a mere formality and should certainly not be cast to the fate of a one-size-fits-all precedent agreement.  Rather the development of the legal agreement provides a valuable arena in which to test the prospects of any future relationship.  The willingness of the franchisee to insist upon terms favourable to its interests together with a non-adversarial, non-combative approach by the franchisor can converge to sow the seeds of a lasting mutually beneficial relationship, which is widely acknowledged to be the key to a successful franchise business.