Franchise agreements...are the non-negotiable?

Are Franchise Agreements Really Non-Negotiable?

Franchise attorneys, franchisors and franchise consultants will go to great lengths explaining that franchise
agreements are largely non-negotiable instruments.  There is good reason for this.  Inherent in the “brand promise” of the franchisor is ensuring delivery of the consumer experience and all elements that make the brand distinctive.  For most brands, the brand promise is keenly developed over time.  It is deeply guarded and defended at all levels. Crafting franchise agreements in a way that safeguards the brand promise while ensuring a consistent consumer experience is imperative, regardless of location or operator.

One of the many risks of expanding a brand through franchising is the exposure to possible dilution of the brand promise.  New franchisees investing in franchises learn at every step of the qualification process that they are buying into a system.  Standardization of franchise agreements helps to sustain the “value”  inherent in the franchising system.  That “value”  is that all franchisees would be held to the identical brand representation, processes, policies and procedures while delivering the goods or services overseen by the agreement.  Everything is designed to protect the brand promise.

Sounds good,  right?  Well,  it is not completely true.

While it is true that franchise agreements are unilateral in nature (not fair, one sided, ridiculously hard to get out of) they are not always “non-negotiable.”  Nor should they be.  You will rarely hear a franchise agreement referred to as a “franchise contract.”   Why?  Because an “agreement” certainly sounds more like two parties entering into an arrangement with full disclosure and acceptable terms.

Savvy franchisors seek to bring new franchisees into their system.  They look for those that possess the experiences, skills and unique characteristics that improve their odds of success while enhancing the value of their brand.  As a result, these unique differences sometimes necessitate small changes to the franchise agreement that are recognized as negotiable.  Conceivable,  as long as the negotiated changes do not “materially” change the standard agreement and there is accepted business logic behind the changes.  Thus, it can be advantageous to all parties including the system itself to negotiate certain terms.

Territory size and term length of an agreement would be examples of items which are negotiable more than others. The negotiation must contain logical and reasonable objectives on both sides.   However, these revisions cannot be considered material.

Negotiation in franchise agreements is rare,  but franchisors allow it in certain cases.

There are other items that franchisors may choose to negotiate.  Payment terms, training, transfer terms, cure periods, franchisor’s right of first refusal and renewal terms are just a few.  Again, I do stress that any negotiation is rare and only entered into at the franchisor’s sole and absolute discretion.  There may also be certain state laws and regulations that require immaterial changes to the franchise agreement.  Here, they are entered as an addendum to the agreement and specific only in the state requiring the changes.

As the brand grows and evolves over time, so does the standard agreement.  It is normal that, on renewal, a franchisee will be required to sign a new “then current” agreement.  If still applicable and non-material, new negotiations may be entered into by both parties.

System integrity is vitally important to maintaining a strong franchise offering.  Illustrating this, the last thing a franchisor wants is to entertain a phone call from a fuming franchisee.  Especially when the franchisee is questioning why another has signed a significantly different, possibly less restrictive agreement than they did.  In such a case, there better be a logical and reasonable rationalization as to why.

Things potential franchisees should know about financial statements

The Importance of the Franchise Financial Statements

Franchise Financial Statements are the track record of the franchise. They are provided for you in the FDD and contain important information about the franchisor’s financial status and strength.

The two most important financial statements you need to review:

  • Balance Sheet
  • Income Statement (3 years preferably)


A balance sheet is a snapshot summary of how much a company is worth on any given day. It reports the financial condition (solvency) of the franchisor. Look for 3 year trends.

Balance sheet categories include:

  • assets – what a company owns: current, fixed, and intangible assets.
  • liabilities – what a company owes: current and long-term debt.
  • stockholders’ equity – the company’s net worth; it is the money the company has taken in from the sale of stock plus any accumulated profits
  • Stockholder’s Equity = Assets – Liabilities = Net Worth

Things you want to see on a franchisor’s balance sheet:

  • increasing assets
  • increasing stockholders’ equity
  • more cash than debt
  • amount of current debt < (less than) 1/2 of the total assets
  • amount of current debt < 1/3 of the stockholders’ equity

Business stability ratios (these measure the business staying power):

  • Current = (current assets/current liabilities) company’s ability to pay bills, Rule Of Thumb is 2:1
  • Quick = (cash+ AR/current liabilities) company’s ability to generate cash, ROT is 1:1
  • Debt to worth = (total liabilities/net worth) “bankers ratio” measures risk, ROT is better than 1.5:1


An income statement reports a company’s profit or loss. It shows a company’s income, expense and net income—also known as the “bottom line” or earnings.

Other names for an income statement include:

  • Statement of income
  • Profit and loss statements
  • Statement of operation
  • Statement of earnings
  • Results of operations
  • Statement of consolidated income 

Income statement categories include:

  • revenues
  • costs and expenses: cost of sales, selling, general administrative, interest expenses
  • income before taxes
  • provision before taxes
  • net income (earnings)
  • net income (earnings) per share

Things you want to see on a franchisor’s statement:

  • a profitable franchisor!
  • increasing profit
  • more revenue derived from royalties and system income than from selling franchises
  • increasing revenue trends, usually > 15%
  • increasing net income trends, usually > 15%

The financial statements should be audited financial statements and contain three years of financial data.
*Suggest that these should be reviewed by a CPA