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Franchise Negotiation Tactics

Presented by:

Yasser Kouatly (CFE)

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How many times have you negotiated a franchise agreement before?

In franchising,“Trial and error” consequences may last 1-20 Yrs.

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The objective:Make the franchisee Better informed &

Better prepared

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Let’s check what you have done so far..

• Exchanged emails with franchisor• Received a standard franchise Kit• Filled an application form• Read and signed the confidentiality agreement• Visited franchisor• Received a copy of the Franchise agreement• Wrote down few comments/questions• MaMa Thinking of consulting a lawyer!?

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Is that enough?

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The classical negotiation phases

Prepare

Discuss

Propose

Bargain

Close & Commit

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1-Preparing IS the right thing to do

What you “should have done” by now• Collection of Info = Power• Visited existing franchisee(s) • Asked for the right documents • Built your own projected P&L• Researched competing concepts and developed a

developed a comparative sheet• Sought expert advice at an early stage• Set your objectives and planned your approach

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Franchising is NOT a Buzzword: Don’t get too emotional about an opportunity!

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NOT always the right reason to a buy a franchise..

• It is cheap (Franchise Fee)• The website is great• I just liiike it!• Payment facilities• Very flexible responses

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Avoid franchise concepts with..

• Questionable profitability• High initial investment• Unprotected territory• High royalties• No franchisee support structure• Unfair termination clauses

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Right reasons to buy a franchise

• Proven concept• Strong brand• Promising financial returns• Training & support• Real estate availability• Suits you personally

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One Golden Rule to remember

You need to be willing to walk-away from what you assume to be a good opportunity if you are

not happy with the franchise terms.(No regrets)

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What is the Franchisor looking for in a franchise candidate?

• Commitment• Passion• Business Acumen• Investment (time & money)• Ethics• Clear Business Plan & Development Plan

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The 3-D Rule about the Franchise Kit

Don’t necessarily believe everything you read.

Do your homework.

Dig further.

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2- Discussing the franchise terms

The Franchise Agreement (FA)

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Main Terms in the FA

• Definitions• Grant of Franchise & Grant of license• Type of Grant : Territory & exclusivity• Contract Duration, renewal & termination• Development plan• The Fees (Franchise/store/royalties/marketing..)• Gross sales, Payment method, & Guarantor• Obligations of both parties • IP Rights & confidentiality• Applicable laws

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Is a franchise agreement negotiable after all?

Yes, to a certain extent.

However, the only rule that applies is that franchisors (or masters) are always reluctant to change the standard terms of the

franchise agreement

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Why this reluctance?

• The essence of franchising is the standardization of the offer, system & service

• Franchisor has moral and legal obligations with other franchisees

• Changing one term may lead to a cascade of other un-wanted changes

• Changing entails an increase in the cost of lawyers, employees, and other consultants’ fees

• Changing leads to dragging negotiations• Too many changes will weaken franchisor/Master’s position• Refusing change is also a Negotiation Tactic!

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What may be negotiated in a franchise agreement?

• All payment terms (Franchise fee, store fees, royalties, marketing, transfer fees, penalties etc..)

• Size of store• Size of territory• Development plan• Agreement on definitions• Product adaptation• Other terms (training/opening hours..)

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What is often OUT of Negotiation

• Trademarks ownership• The brand image• Recipes & processes• Ownership of OPS Manuals• Ownership of any new development(s)• Termination clauses• Applicable laws• Language of the agreement

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The Franchise Papers & Documents:

YES.You need to read them all and/or seek assistance

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3-Common FranchisEE Tactics• Hire an expert• Lowball: Buyers start low and they can always go up• Low-Key approach: don’t look too enthusiastic• No Authority: refuse to agree because you are not “allowed” to.• Split The Difference: Offer to agree on a half-way position.• Escalating demands: the more you get the more you require• Go For A Walk: Take time out to diffuse tension or to consult• Breaking it Off Walking away from the negotiation• Bluff: Stress on things that are not necessarily true• Not Happy: State that you are not happy about the offer• Change the negotiator: New person sets new rules

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Common FranchisOR Tactics

• Control the Agenda• Un-discussable• Non-negotiable• Price not negotiable• High Ball (sellers starts high)• Reducing choices: this or that• Trial Balloon• Deadlines/false deadlines• Take it or leave it

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Why hire a franchise expert?

Simply because Franchise negotiations cannot be learned or mastered just by reading few

books or by online browsing.

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The added value of the franchise expert

• Speaks “fluently” the franchise language• Knows the trade’s secrets and tactics• Knows what exactly to ask• Teaches you when and how to maneuver • Helps you become more confident & “At par”• Ads value and credibility to your counter proposal• Knows when to “walk away”• In All, Gives you a better negotiation position

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The FE brings a much needed balance to the Negotiation process

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4- Negotiating the size of the territory: the proposal

Single Franchisee

Area Development Franchisee

Master Franchisee

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Early Franchise Expansion Model

FRANCHISOR

MASTER FRANCHISEE

Sub-Franchisee(s)

Corporate Stores

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Drawbacks of early model

• Franchisor is giving up all major franchise rights in one signature

• The Master’s full capacities are not being tested yet• The Master will often concentrate in one region and neglect

others in his territory• Some Masters cannot succeed in putting together an efficient

franchisee support structure • If relationship goes bad, all the territory will be affected and

locked for a long time• Motivation of Master is at lower level if given all what he asks

for just from the beginning

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Current Franchise Expansion Strategies

FRANCHISOR

MASTER FRANCHISEE

AREA DEVELOPMENT

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FRANCHISOR

MASTER FRANCHISEE

Sub-Franchisee(s)

AREA DEVELOPMENT

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5-Final Bargain: The Franchise Matrix

x 1000 USD A B C Remarks

Master Franchise Fee or 100 75 50 Single Franchise Fee 30 25 20Store Opening Fee 5 8 10Royalty paid by Master 2% 2% 2%Royalty paid by Franchisee 4% 4% 4% 75%-25% SplitMarketing Fee 1% 1% 1% 75%-25% Split

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How long does the initial franchise negotiation normally lasts?

From 3 to 6 months

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Be well Prepared: success is not a coincidence

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