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I'm going to reveal the secrets to negotiating a franchise agreement that the brands do not want you to know. I've been in Franchising for 15 years and built a multi million dollar business and I felt dozens of people buy their first franchise. So this video is packed with all of the knowledge and experience to not only get you the best deal, but also to help you avoid catastrophic disaster. Specifically one thing that almost bankrupt me. So let's go. And as a disclaimer, I am not an attorney and none of this video is to be taken as legal advice. I am simply giving you my opinion as a franchisee. I highly recommend that you hire an attorney to review a franchise agreement before you sign anything. More on that later. First I want to talk about what can you negotiate in a franchise agreement? The number one thing where I see my clients get flexibility on is territory. So in a mobile franchise you get a defined territory. Now each brand uses different metrics to create territories such as the total population, the number of households over a certain income. And for specialty brands like pool cleaning, it could be the number of pools in senior care, could be the number of seniors. And the more open territory in your market, the more flexibility that they will have. Well, on the other hand, if all the territory around you is sold, there's nothing to negotiate here. And here's what I look for in negotiating a territory. Every franchisor using mapping software to create territories based on their defined criteria. The software isn't perfect and sometimes it creates territory boundaries that don't make a lot of sense to someone who lives there. So for example, I've got a map here and you can see these lines are the different territories that, you know, the mapping software has created. One of my recommendations is to try to prune the territory. You would work to try to clip off areas that you don't really want and, and then in the same turn try to add areas that you do want. Now the franchisor is going to require that all territories, you know, be connected. Like, you can't just like take a zip code over here and delete this and then add another one over here. It all has to be connected, it has to be contiguous, it has to make sense. But there is flexibility as you're working through this. And you can see like here in this example, this territory has a little bit over the bridge and you say, hey, that doesn't really make sense. Like I want my territory to end so you don't have to cross the bridge. But you know, there's this weird cut out here, like, I want that. And actually, you know, there's a city that's like cut in half. I'm going to like, want that city. I'm going to want, like Hershey here. You would work to try to like, massage the territory to your liking. So it makes sense. Now the thing to keep in mind here is the territory sizes. So when pruning a territory, you can try to squeeze out a few more zip codes, like within it. Let's say a brand defines one of these territories as 200,000 people. And so you could try to get another like 10 or 15% population. So maybe you can try to get 220, 230,000 people as an example. The more territories you're buying, the more leverage you will have here. So, for example, let's say I was buying these three territories, which is, I don't know, 600,000 people by default. I might be able to get that to 650 or even 700,000. So in this case, maybe it's a, hey, I want this territory is part of this. I want this one as part of that. I want to, like, try to go up here, over here. These are already sold. So, like, there's nothing I can do on, on these lines. But the green areas, the open areas, there might be flexibility. Now sometimes there are territories that nobody really wants for whatever reason. You know, they could be down here and they border the state to Maryland's down here. There could be this thing that's like, nobody really wants it. It's kind of an island. It could be just like not a great part of town. So maybe they give you this giant area or maybe this really tiny area, tons of population, like let's say in Philadelphia, but like, not that great of an area I've seen franchise or is basically like give away that territory as part of a larger deal. Territory is the most flexible part, is the part that you have the most leverage in terms of getting what you want, getting bigger areas, getting better areas. The more you buy, obviously, the more leverage you're going to have. The other part of territory is expansion, right? The best option is if you can get a first right of refusal on neighboring territories. So let's say I bought this territory. I'd say, hey, I want a first rate, a refusal on this one and this one. But most of the time, franchisors are not going to give you this because it gets really messy. For example, what if your neighboring franchisee had the first right of refusal? So let's say this guy down here in York, Pennsylvania had a first rate of refusal on Mechanicsburg and you're over here in like downtown Harrisburg. So he has first rate refusal on this territory that is currently open. But you over here are the top performing franchisee in the market and he is the worst. The franchisor wants this territory to go to the best operator, which is you, but they are contractually obligated to sell it to him if you decide to move forward, right? Because he is the first right of refusal if you say, hey, I'm going to buy this. Contractually they would have to go to him, he would have to match or like do it. And they may not want to do that. They've got this situation on their hand that they want this territory to go to him, but because a bad decision they made, you know, earlier on when they were maybe desperate to get somebody in, it potentially could go to him. It is highly unlikely that you are going to get a first right of refusal because of this situation. And there's like these unknown factors. However, it is common to have some sort of handshake deal that you will be made aware of if there are other serious buyers of the territory that you're interested in and you've got it like earmarked and at that point they'll come to you, say, hey, we got somebody who's really interested in Mechanicsburg. What do you want to do here? At that point you have to decide. You could let someone else go for it, you could see how it all shakes out. Or, you know, you come up with the money, you buy the territory and you move forward with it. But that's where you have the most flexibility in negotiate territory. So in a retail business you have a physical box, right? You don't have like this defined territory, but they will give you, or they could give you a protected radius around the location. Think of, you know, a spa, a salon, some sort of pet care thing, right? So for example, one of our clients, they were looking at a brand that had a three mile radius and through negotiations he was able to increase that protection to 5 mile radius. As a franchisee, you want the biggest radius possible to protect new locations from stealing market share. Now with my Midas shops, we technically have zero protection. There is zero radius in our franchise agreement. But that does not mean that the franchise or is approving shops like right next to each other. They have this advanced mapping software and they want to analyze like where our current customers from every shop live, where do they go and, and they want to use that to predict how a new Shop could potentially affect the other ones. Ultimately, it's going to be their decision to approve or deny a location based on what they believe is best for the brand, not just the legalities. You really want to understand that, especially if it's a brand like Midas that has zero protection. You want to kind of go into that knowing what are the risks and then also knowing like how they handled this in the past and be okay with whatever it is. So territory is the number one thing I see flexibility on the. The number two thing is ongoing fees. You're going to find these in item 6 of the FDD. It is unlikely that a brand will lower the royalty percentage unless they're desperate to have you on board. And then honestly I'd be very cautious if they were that desperate that they're going to lower the royalty just for you. However, there is another component of a royalty that might have some flexibility and it's the minimum royalty. So it's very common for a brand to set a monthly minimum royalty. So for example, here we have a brand that charges a 7% royalty with a monthly minimum royalty that increases over time. You can see there's no minimum for the first four months. And then from months five to 12, there's a $500 per month minimum. For some quick math, if you did $5,000 in sales times 7%, that'd be a $350 royalty. You would not meet that minimum. So you would owe them $500. Now, the next month, if you generated $20,000 in revenue at a 7% royalty, you owe $1,400 and you're well above the 500, so you're paying the 14. And when looking at minimums, you have to ask yourself like, are these reasonable numbers? In this case, once mature after two years, they've got a 1500amonth minimum. That would only kick in if you were doing less than $21,000 in sales. Based on like what I know about this, this business model, if I'm not doing $21,000 in two years, I've probably lost faith in the business model isn't working. And I like am selling at that point. If the minimum sales required seems unreasonable, like let's say it's $100,000 and you look at the quartile of where other franchisees rank and that's like pretty high up there, then yeah, I'd have a problem. Be like this is like way too high. This is like unachievable. You don't even have franchisees doing this and you Set the bar like way too high franchise or set minimum royalties to ensure that multi unit franchisees actually open and operate all their locations. So for example, if I bought all the rights to like Austin, let's say it's five territories but I only service one of them and then I'm sitting on the rest of the city basically doing nothing with 80% of it. Now in this case, the franchisor would have been better off selling me just the one territory that I'd operate in and offering the other four to franchisees who would actively develop it. You know, they use that minimum to kind of force you along to say hey, you got to get these open. You know, if you're going to be paying royalty, you might as well be generating sales to motivate someone who buys a lot of these territories. So from a negotiation standpoint you're, you could try to get these minimums eliminated, reduce or extend the time frame. If anything, you'll probably have the most luck on pushing back the date. So for example, that 1500 hour minimum that kicks in at 24 months, you may have luck in pushing that start date out to 36 months. The next thing I look at in item six here is the brand fund. Now every brand has a required brand fund which is usually 1 or 2% of sales. And it basically goes into this like slush fund that they can use to, to promote the brand, right, to do brand partnerships, to hire influencers. It's not direct marketing but it creates brand awareness which over, you know, times is great for the brand. Now sometimes there is a clause in there that says it is currently 2% but we reserve the right to increase this at a Future date to 3%. Now one of our clients was able to negotiate a permanent cap to says hey, it's currently 2%, I want to lock in 2%. You're not allowed to raise it to 3% for me. And they had success with that. So it's something to look at. The next thing I would pay attention to is transfer fees. Now every brand charges a transfer fee that gets paid when an existing franchisee sells to another franchisee. Some brands charge a fix a dollar amount anywhere between 5,000 to $10,000 when others do a percentage of the then current franchise fee. So for example, in five years from now when someone goes to sell, if the franchisee in five years franchise fee is $60,000 and they charge the then current fee, the transfer would be $12,000, right? 60,000 times 20%. If your goal is to acquire other locations, I would Try to negotiate a reduced transfer fees up front even if you're not going to incur it for a couple of years. And while the seller is usually responsible for this expense, it could help get a deal done if it's more money in their pocket at the end of the day in terms of what you can negotiate. You know, you really got to look at the numbers and see where there's a gap there. Maybe you try to have a fixed fee of $5,000 and not this percentage. Maybe you try and get less, maybe you have it capped at a certain amount. You could try to be flexible on this. And if you're a good performer, I've seen people have success with this one. The third thing I want to get into now is the startup cost. So these can be found in item 7 of the FDD. And really pay attention to the fees that are paid directly to the franchisor. You know, fees paid to third party they really have no control over. They're probably not going to bend on the franchise fee, right? The big chunk of money that you're going to have to pay them to buy into the brand. Primarily because some states require them to disclose if they lower it and they don't want to like open the discussion for every other franchisee because they gave it to one person. However, there are other fees that they can flex on that don't require this disclosure. Training fees and there's like a business development fee, some sort of like marketing set up. All of these are fair game to understand what am I getting for this and if there is any sort of flexibility. Now the fourth big thing to look at is development timeline. So if you sign up for multiple territories, you, you're going to sign what's known as a multi unit development agreement which defines the timeline that you have to get these units open. So for example, you might agree to open five units over the next five years, basically one unit every 12 months. This timeline ensures that the market that you bought is on schedule. It avoids territories that you buy and then just sit there like unopened. Failing to meet these milestones that are agreed upon in your development agreement can result in penalties or even losing those locations, like losing the money that you paid to buy to buy them. So it's critical to negotiate a timeline that's realistic and achievable for you. And I recommend here, do not bite off more than you can chew. Sometimes people want to write a big check. They want to be all proud of some number, but then they like they don't have the capacity or they don't have the funding to actually get them open and then you end up losing money and it's really stressful. Franchisors often are willing to have some flexibility in these development timelines. Here's a couple of ways you can approach it. Number one is to extend the schedule. You can negotiate extra time in the development schedule to account for like unexpected delays, construction permits, staffing, or anything else that come up. Instead of committing to open like one unit every 12 months, you could try to get, you know, one unit every 18 months to give yourself some more breathing room. The other thing you can do is try to backload the timeline. Propose opening, you know, one unit in the first two years and then accelerate that timeline to two units every year. After that you could try to get like you open the first one right away and then the next one you open in 18 months and then the next one within 12 months, and then the next one within nine months. The next one was six months. Because you as an operator are going to improve in opening locations after you've done it a few times. You get experience. You kind of know what kind of properties. You get to know the real estate agents, the construction guys, right? Like you are going to get better at opening them as you get more experience. If you can have a timeline that's not linear, but you know, exponential in some ways, that may be helpful to you. Another way you could approach it is a performance based timeline. So instead of having a fixed date, you could try to negotiate some sort of performance based milestones. Opening a new unit could be tied to revenue or profit targets on your existing locations rather than being tied to a calendar. Next up is the big one. This is the one that I wish I knew years ago that would have saved my ass. And it's called liquidated damages. Reminder, not an attorney. None of this is legal advice. But liquidated damages sets a predetermined amount of money that you would owe the franchisor if you terminate your franchise agreement early. Or if the franchisor terminates it due to you breaking a significant rules in the contract. It compensates a franchisor for lost revenue or harm to the brand. The most common formula for calculated liquidated damages is multiplying your average monthly royalty payment by the number of months left on the agreement. For example, if you are typically paying $2,000 per month in royalty and you have 50 months left, you could be on the hook for $100,000. Some franchisors also try to add that brand fund and other fees that you would pay them into those calculations. Now this exact scenario happened to me as a franchisee years ago. I was losing my shirt in a franchise that was not a good fit for me. I tried to sell to other franchisees but they weren't interested. I tried to sell it on biz by sell but it's hard to sell a money losing business to an outsider. So I just wanted to shut it down, walk away. And I had no idea about liquidated damages until I told the franchisor my plan was and they threatened to sue me for almost $900,000. My franchise agreement was 20 years. I had 15 years remaining. I was paying about $60,000 a year in royalties. Times 15 years is $900,000. This led to many sleepless nights as I tried to navigate the best path forward to get out of the deal. I ended up selling to a neighboring franchisee for $1. This experience is one of the driving forces on why I create content like this video. It's why I create a ton of education in my free coaching program that helps people buy their first franchise. Owning franchises had made me millions of dollars, but it's also led to some pretty dark days. And. And if I had watched this video prior to signing, I would have not signed that agreement. And you end up working with my team. We'll provide you with a due diligence checklist that covers a ton of different categories. You know, leadership, the fdd, financial modeling, growth plan and more. We get you connected to attorneys. There's lots of things that we do that I wish I had done years ago that would have helped me a ton. There's a link in the description if you want to learn more about any of that stuff. Franchise ors use liquidated images to protect their footprint. This is the flip side, right? So today I own over 30 Midas Automotive repair franchises. And what if a competitor like Discount Tire came to me and they made some ridiculous offer to buy all of my shops? What if they made an offer that no other Midas franchisee could match? If I sold, Midas would lose like 60% of their stores in Philadelphia and New Jersey. That'd be a huge blow to the brand and other franchisees who share in those local marketing funds. Liquidated damages plus other controls that are in place protect against a situation like this. Here are a few things that you can try to negotiate on related to liquidated images. Number one is to completely eliminate it. This is the best option for you, but might be difficult for them to agree on. Based on those scenarios, you could look to cap the damages. For example, you could try to get it capped at 12 months of royalties or a fixed dollar amount like $50,000. It's common to see brands proactively set caps, often around 36 months or the time remaining, like whatever is lower. So in my scenario, this would have reduced my potential liability of $900,000 for 15 years to $180,000 if it was only three years. Another thing is to reduce the payout over time. So another strategy is to negotiate some sort of sliding scale of liquidated damages that decreases over time. So instead of being on the hook for the same amount regardless of when you exit, the penalty could shrink as the years pass. And you can also look to get some sort of exception for special circumstances, like some sort of health issue or losing money, or like other scenarios that are kind of beyond your control. Another thing to keep in mind here is that branches must close in item three of an fdd. Any legal action. So if a franchisor threatened to sue me for liquidated damages and pushed forward, it would turn into a legal battle. Like I would go down swinging and they would eventually have to sue me or I would sue them and. And then those lawsuits would appear in item three for the world to see. I would run away from a brand that. You see a lot of lawsuits in item three, specifically ones where the franchisor is suing franchisees for damages, like this one where they have multiple pages of lawsuits suing franchisees. Section 2 here. Best practices when negotiating a franchise agreement. So the first thing we got to look at is emerging versus legacy brands. An emerging brand is a newer brand who's looking to grow, which means they are often flexible and open to negotiation. Emerging brands also come with a higher level of risk. They don't have the same track record as a legacy brand, which means you might be able to get a better deal up front. But there's more unknowns about the future. They are still building the systems. They probably don't have a lot of consumer brand recognition and there are definitely going to be bumps in the road. That being said, with high risk comes potential higher reward. The brand does take off. Being one of an early franchisee could have a huge advantage. You can buy bigger territories, better locations, and you could have more influence. Now, on the other hand, a legacy brand, one with a long history, well established reputation, offers more stability. They've already proven their success. They've built strong support systems. They have brand recognition. This also means that they're less likely to budge when it comes to negotiating anything in their franchise agreement. They don't need to bet, they don't need to attract new franchisees. And a lot of times their position is take it or leave it. And from their perspective, a hundred other people signed the same agreement when the brand was less established. So why would they give you a better deal when in a lot of ways the brand is less risky? Does that make sense? Next, let's get into hiring a franchise attorney. I highly recommend hiring an expert franchise attorney to review the agreement before you sign it. To do not hire your neighbors, cousins, brother, whoever who did your will like 10 years ago. Hire an experienced franchise attorney. They usually charge a flat rate, like 2 to $3,000 to do a franchise agreement review. Now, keep in mind, these guys aren't Chris Voss. They aren't some franchise negotiating guru. Their job is to make sure that you are 100% clear on what you are signing. Like, you may not like all the terms, but you have to understand and agree to them there. And there are some other key legal areas a franchise attorney is going to pay attention to. Personal guarantees. All franchise agreements require you as a franchisee to sign a personal guarantee. This means that even if your business is set up, you know, as an llc, a corporation, whatever, you are still personally liable for any debts or obligations like royalties owed to the franchise. Now, a franchise attorney might help you evaluate the scope of those personal guarantees, try to negotiate or minimize your personal exposure. The second thing they might look at is termination clauses, the conditions under which the franchise can terminate those agreements. A good attorney will help identify overly harsh terms and work to soften them, giving you more protection. They're going to look at your renewal rights, which means at the end of your franchise agreement, you're likely going to want to renew the agreement and continue operating it. So they're going to look at that. Not all franchise agreements offer an automatic renewal. They might include some restrictions or new fees. And a franchise attorney will review these options and ensure that you know you're signing and you have options to continue. If you're performing well, they're going to look at transfer rights. So this is like when you look to sell, you want to understand what those transfer rights are. They're to look at a dispute resolution. Another critical area is if you are in default, like you've broken one of the rules, there is some sort of process to overcome that so that you can, you know, resolve it and continue to move forward. Dispute resolution. Most agreements will specify how disputes between you and the franchise were handled, whether through arbitration, mediation, Litigation, Whatever it is, a franchise attorney can help you evaluate these clauses and ensure that the process is fair and aligned with the industry standards. Next up, we have the best approach to negotiating. Franchising is a relationship business. And how you handle these conversations early on will say a lot about you as a franchisee. So here's the best approach to getting what you want. Number one, make it person to person. You are not negotiating with a basis corporation. You're dealing with real people who are looking for great partners. And this is why it is best to handle all the communication yourself. Person to person. You need to build that relationship with the franchisor, the founder, the CEO, whoever the leadership team is. Let them know who you are in your vision for growing the business. And do not let the franchise attorney be the one negotiating directly with the brand. While it's great for them to review the legal terms, it's important that you stay out in front in the center of the discussions. And number two is to write down everything you want before you go into any negotiation. You should have a list of everything you're asking for. Put it in like one clear, organized document. This not only helps you keep track of like what's important, but it just makes the conversation smoother. And the more concise and focused you are, the easier it is for the franchisor to understand where you are coming from. So lay out your reasoning for each request. Whether it's like a bigger territory, reduced fees, you know, whatever the lawyer comes up with. Right. And explain why it's beneficial on both sides. Keep it simple, keep it to the point. No need to write like an essay on each request. You just want to get to it. Number three is to not be annoying. Franchiseors can flat out reject you if they don't like you. You can have perfect financials, you can be super qualified financially, but if you come across as someone who's going to be a headache, they may decide that you're not worth it. Number four is understand that you may get nothing. You are probably not going to get everything you ask for. You may get nothing. That's okay. The franchisor has their own priorities and business model to protect. So don't take it personally if they shut you down. And at the end of the day, it's a business decision on both sides. So don't let your emotions get tied up in this process. If you don't get the terms you're hoping for, you need to ask yourself the big question, which is, can I still achieve my long term goals of cash flow? Of wealth, of legacy, of freedom, of all these different things with the agreement as it is written. And if it's yes, then you're good to move forward. And if it's no, then you know you probably have to move on and find another option. Remember that the franchise agreements are written heavily in favor of the franchisors. They are designed to protect the long term reputation of the brand. And if other franchisees are delivering poor service, cutting corners, hurting the brand, it could affect you. And so these franchise agreements give the franchisor the ability to audit those operations, enforce quality control, terminate franchisees who are hurting it and why. It sounds tough. It's actually what you want. Franchise agreements ultimately benefit the best performers. I hope you got a ton of value from this video. If you want my team's help in finding a great franchise, click the link below to book a call. In the meantime, if you want to learn more about negotiating a franchise resale deal, check out my video here on seller financing. I'll see you on the next one. Cheers.