Negotiations are an important stage of the franchisee onboarding process and it is essential that franchisors are ready and prepared to respond to negotiation requests from prospective franchisees. Franchisors should be seeking to strike a balance between sweetening the deal for a prospective franchisee while also maintaining critical protections. 

This factsheet takes you through several important factors as you approach negotiations with a prospective franchisee. 

Franchise Negotiation Process

When Do Negotiations Occur? 

Negotiations typically occur once the franchise agreement (along with the disclosure document and the Franchising Code of Conduct) has been sent to a prospective franchisee. Generally, the franchisee will have obtained advice from a lawyer or other professional adviser such as an accountant. 

However, in practice, negotiations can start much earlier than this to discuss ‘special’ (alternative) terms with a prospective franchisee. These are often discussed informally, even before documents are issued. For example, before issuing a prospective franchisee with documents, you might agree with them that you will grant a three month royalty-free period to get their business up and running.

Informal discussions before documents have been issued are still subject to the laws concerning good faith and misleading or deceptive conduct as explained below.

What Laws Should I Be Aware of When Negotiating?

There are several laws that are relevant to franchise negotiations that can become the source of future disputes. Accordingly, as a franchisor, it is crucial you handle negotiations in a way which complies with these laws. This will help you to avoid trouble down the line such as a claim being brought against you by a franchisee or the ACCC conducting investigations relating to your conduct as a franchisor.

Issue Summary Key Tips for Handling Negotiations 
Unfair Contract LawsUnfair contract laws allow a court to deem terms in ‘standard form contracts’ as unfair and therefore unenforceable. Standard form contracts are contracts that have set terms and conditions. These laws affect contracts where:at least one party has less than 20 employees;the contract is a ‘standard form contract’;the up-front value of the contract is under $300,000, or if the contract continues over one year, then under an up-front value of $1,000,000.  Unless your franchise agreement terms are modified, they may be captured by unfair contract laws. It is important to provide franchisees with a genuine ability to negotiate the terms of the agreement. This makes it less likely the franchise agreement will be deemed a ‘standard form contract’, increasing your chances of enforcing it should a dispute arise.Under these laws, if certain agreement terms are considered unfair, your franchisee may have a right to request amendments. They may even be able to vary the contract without your consent. 
Verbal and Written RepresentationsAnything that you say or represent verbally or in writing in the pre-contractual stage cannot be excluded from being referenced within the contract.
This means the franchisee may wish to include something you have said in the agreement.
Any non-standard representation or warranty should be recorded in the special conditions and warranties section of the franchise agreement, or in a separate document signed by both parties. This will help prevent a franchisee saying that another (unrecorded) representation was made to them.
Good FaithThe Franchising Code of Conduct requires both franchisors and franchisees to operate in “good faith” in their dealings with one another. This applies to all aspects of the franchisor-franchisee relationship, including the pre-contractual phase.
This means the parties must honestly disclose information and deal fairly when negotiating. 
Good faith does not require that a party act against their commercial interests. You do not need to concede on every point but you should not arbitrarily use your superior bargaining power as a franchisor. 
Misleading or Deceptive ConductWhen undertaking negotiations for a commercial contract, such as a franchise agreement, the law says that you cannot engage in conduct designed to mislead or deceive someone into entering into the contract. 
This includes anything that you say or represent verbally or in writing in the pre-contractual stage. If a dispute were to arise, the franchisee could use this evidence against you. 
Do not make promises you cannot keep. If you make statements or representations regarding future matters (e.g. how much revenue the franchise will generate), you need to have a reasonable basis for these statements (e.g. the number you state has been achieved by similar stores). If you have no reasonable basis, this statement could be misleading or deceptive. 

Negotiation Tips

As long as you conduct negotiations within the parameters of the laws set out above, you are free to implement your particular negotiation style or flair as you see fit. Below are a few general tips for handling these franchise negotiations.

Understand Warranties & Special Conditions A warranty is an assurance given (generally by you, the franchisor) about the franchisor or its practices. Generally, there are several warranties set out in the body of the franchise agreement. However, during negotiations, a franchisee may request additional warranties. 
Tip: Use warranties to give assurances that are not attached to one of your existing franchisor obligations. e.g. “The franchisor warrants that it has no immediate plans to change the Intellectual Property of the franchise system.” 
A special condition is a variation to the ‘standard’ terms that you offer in your franchise agreement. A special condition may amend, replace or delete a standard term.

Tip: Use special conditions to incorporate negotiated changes. E.g. “Clause 10.1 is amended by replacing the words “within 5 business days” with the words “within 10 business days.”

Rather than change your standard contract terms in the body of your agreement, any agreed changes should be placed in a separate schedule. e.g. a warranties and special conditions schedule at the end of the contract. This helps keep your contracts consistent, so that your ‘standard’ terms are the same in each franchisee agreement, and any variations are set out separately. 
Accept non-controversial requests In franchise negotiations, it often goes a long way to accept changes requested by the franchisee where those changes relate to relatively minor aspects of the franchise agreement and do not threaten your key contractual rights and discretions. 

Agreeing to changes of this kind can be a show of good faith, demonstrating that you are acting reasonably and are willing to amend the standard form contract. This also allows you to argue that unfair contract laws do not apply if a future dispute regarding the terms of the contract were to arise. Giving ‘easy’ concessions can give you leverage or ‘stock’ when you need to push back on a more controversial or difficult request. 

For example, if a prospective franchisee requests ‘reasonable notice’ before an inspection or audit, this is a minor and easy change that you can accept.
Offer alternatives to proposed amendments Where a proposed amendment cannot be accepted in the existing form, rather than refusing the request outright, consider if you can offer a more agreeable alternative. For example, a franchisee requests that an indemnity provision be removed. Rather than just refusing, consider offering to include a ‘carve out’ to the indemnity (i.e. amending the indemnity, rather than removing it). This would limit the effects of the warranty under certain circumstances (such as where loss is caused by the franchisor’s gross negligence). 

Tip: If you offer an alternative, you are showing that you understand why the request has been made and are flexible enough to offer an alternative solution. 
Know when it is acceptable not to agree to an amendment Sometimes a proposed amendment simply cannot be agreed to in any circumstance and there is no suitable alternative as a compromise. This is acceptable and necessary at times.

Some changes may fundamentally increase your liability or remove a crucial right you would otherwise have received in the franchise agreement. Among other factors, franchisors should generally avoid compromising in relation to: 
– including a personal guarantee (the requirement that the franchisee’s director sign
– the agreement as a guarantor);a right to update the intellectual property (trade marks and signage); and
– a right to change the range of goods or services; and indemnities in favour of the franchisor.

Of course, for some of the points above, it may be possible to offer a suitable alternative. However, it is often best to avoid agreeing to these types of substantial changes.

Tip: If you need to refuse a request outright and are unable to offer a concession or alternative, try to give reasons for why the request cannot be accepted. This gives the franchisee a chance to understand where you are coming from and the risk you would be exposed to by the amendment.

Checklist

Strategies for Effective Negotiation

  • Be willing to negotiate when faced with reasonable requests;
  • Do not make promises you cannot keep;
  • Record all representations that are not contained in the contract;
  • Offer a counter-proposal rather than rejecting a requested amendment outright; and
  • Avoid compromising when it comes to essential protection mechanisms.

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