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To what extent can a franchisor negotiate to recruit, or retain, an attractive franchisee?

Fasken
Reading Time 5 minute read
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Franchising Bulletin

For many reasons, most franchisors never, or only rarely, negotiate the provisions of their franchise agreements with a new franchisee.

However, what if a franchisor is really interested in recruiting a new franchisee who is very attractive to the franchisor, or if a major franchisee in the network requests adjustments to certain provisions of its franchise agreement before extending or renewing the term of her/his franchise agreement?

To what extent can a franchisor agree to modify the provisions of its franchise agreement in order to recruit, or retain, an attractive franchisee?

Not at all, some may say, even if the franchisor loses a candidate or a franchisee that it would particularly like to recruit or retain within its network.

Although theoretically advisable, this approach can pose a serious obstacle to the growth of a network.

The post-COVID-19 recovery context that we are experiencing today, which may last for several more months, increases the pressure on franchisors to make every effort not to lose interesting opportunities for the growth of their networks, as interesting candidates for a franchise are few and are also more and more expensive to search for and recruit.

In fact, a franchisee or potential franchisee who is already in business or who has substantial resources is generally advised by experienced professionals who will analyze the agreements proposed by the franchisor and will often request some changes in order to well protect the interests of their client franchisee or potential franchisee.

Here are some suggestions as to how a franchisor might approach such a negotiation in order to both recruit or retain such a particularly attractive franchisee and not compromise the sound management of its network or the quality of its relationships with its other franchisees:

1. First of all, and in order to prevent difficulties with other franchisees not benefiting from the same arrangements, any well-drafted franchise agreement should provide for the franchisor's right to enter, with any other franchisee or potential franchisee, into agreements which contain differences between them.

2. Secondly, when faced with requested modifications, a franchisor should distinguish between, on one hand, (i) the provisions of its franchise agreement which require common and uniform management of the entire network (such as, for example, provisions relating to procurement, websites, use of trademarks, etc.) and, on the other hand, (ii) those which do not require common management and which are specific to each franchisee (for example, the protected territory, the term of the agreement, the number and duration of renewal periods, the duration of the non-competition covenants, the persons subject to the non-competition covenants, the transfer of the franchised business, the method of holding the lease, the sureties required for the obligations of the franchisee, etc.).

In general, in order to be able to manage effectively and consistently its network, a franchisor should not agree to modify clauses requiring common or uniform management for the entire network (except in the case where the new franchise is located in a completely separate market for which it is possible, without any impact on any other franchisee, to have different management).

3. While no law requires a franchisor to enter into identical agreements with all of its franchisees and, therefore, a franchisor has the right to make accommodations to a franchisee of particular interest to its network, it remains important to maintain some consistency and uniformity to avoid, to the extent possible, dissatisfaction and frustration among franchisees.

How can this be done?

Basically, by being able to justify the arrangements made in terms of the values of the franchisor and its network, as well as the benefits to the entire network of recruiting or retaining the franchisee who benefits from them.

4. For the same reasons, it is important to avoid making changes that could be perceived as contrary to the interests of the network as a whole.

An example of such a change to be avoided is the rate of the franchisee's contribution to the network's common advertising fund.

Exempting a franchisee from the obligation to contribute to this fund, or granting a reduction in its contribution (except in certain very special cases, such as, for a temporary period of time, in favour of a franchisee in serious financial difficulty, etc.) is an arrangement to be avoided since this fund is not for the sole benefit of the franchisor, but for the benefit of all of its franchisees.

In general, we suggest the following test for deciding whether or not to consent to a modification to your franchise agreement: Would you be comfortable if this modification was known by all your franchisees?

If the answer to this question is no, or if it raises questions, think carefully before you consent.

While a particular arrangement negotiated with a franchisee may be subject to a confidentiality agreement, such a covenant is never an absolute guarantee that other franchisees will not find out about it.

Experience in franchising shows that, for a variety of reasons, it is extremely difficult to maintain for more than a few months the confidentiality of an agreement entered with a franchisee.

A final word of advice: Do not write the specific changes agreed to with a franchisee in the franchise agreement itself, but in a separate amending agreement. This will later make it much easier to find the agreed-upon changes (which will then be consolidated in the amending agreement) without having to go through the entire agreement to try to locate them.

Fasken has all the expertise and resources necessary to help you draft agreements that are complete, adequate and that protect your rights, while avoiding potential pitfalls.

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