Franchise Negotiation Tactics Presented by: Yasser Kouatly(CFE)
How many times have you negotiated a franchise agreement before? In franchising, “Trial and error” consequences may last 1-20 Yrs.
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 • MaMaThinking of consulting a lawyer!?
The classical negotiation phases Close & Commit Bargain Propose Discuss Prepare
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
Franchising is NOT a Buzzword: Don’t get too emotional about an opportunity!
NOTalways 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
Avoid franchise concepts with.. • Questionable profitability • High initial investment • Unprotected territory • High royalties • No franchisee support structure • Unfair termination clauses
Right reasons to buy a franchise • Proven concept • Strong brand • Promising financial returns • Training & support • Real estate availability • Suits you personally
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)
What is the Franchisor looking for in a franchise candidate? • Commitment • Passion • Business Acumen • Investment (time & money) • Ethics • Clear Business Plan & Development Plan
The 3-D Rule about the Franchise Kit Don’t necessarily believe everything you read. Do your homework. Dig further.
2- Discussing the franchise terms The Franchise Agreement (FA)
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
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
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!
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..)
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
The Franchise Papers & Documents: YES. You need to read them all and/or seek assistance
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
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
Why hire a franchise expert? Simply because Franchise negotiations cannot be learned or mastered just by reading few books or by online browsing.
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
Early Franchise Expansion Model FRANCHISOR MASTER FRANCHISEE Corporate Stores Sub-Franchisee(s)
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
Current Franchise Expansion Strategies FRANCHISOR AREA DEVELOPMENT MASTER FRANCHISEE
FRANCHISOR Sub-Franchisee(s) AREA DEVELOPMENT MASTER FRANCHISEE
How long does the initial franchise negotiation normally lasts? From 3 to 6 months