How To Negotiate Franchise Fees and Royalties

Starting a franchise can be an exciting decision. There are, however, certain factors you need to consider before you sign the dotted line. A franchise agreement is important, and understanding what goes into the agreement can play a huge role in determining the final fees and royalties.

Although a lot of people believe franchise agreements are non-negotiable, with the right skills, you can negotiate a deal to agree on franchise fees and royalties in your favour.

Negotiating Fees and Royalties Is Key

Once you narrow down a franchise you want to opt for, you should go through the agreement minutely. There are bound to be various instances where you feel the deal for franchise fees and royalties could be better. These areas are where you start negotiating before you sign the agreement.

Even if the salesperson claims the deal is non-negotiable, you should put your bargaining skills to the test or consider hiring a professional lawyer to do so. The numbers in the agreement can always be negotiated, so take your time going back and forth till you’re happy with the numbers.

Extensions

Every business has its ups and downs, so it’s better to be prepared for the downs in advance. Certain extensions should be granted to a franchise owner. While it’s common to believe these are based on relationships, having them in writing is wiser. Not only will this help you avoid late fees, but it will also prevent your relationship with the brand from going bad.

Obtaining Waivers

It’s common from time to time for large franchisors to make a company-wide decision all franchise owners are forced to follow. These could be minor changes to the business or something major like a complete rebranding. Often, the franchise owner has to bear the price for the change. It’s better to have a waiver mentioned in the agreement that makes it flexible for the franchise to incorporate these changes in their time frame.

Research The Industry

While there’s always room for negotiation, it needs to be realistic. Franchisors are most likely to have multiple franchises around your location. Gathering information about these stores, their royalty structure and fees would be a good idea. This will help you determine how much wiggle room you have without upsetting the franchisor or cutting yourself short.

Transparency About Fees

Often, franchisors miss mentioning fees or expenses that a franchise owner might only realise once they’re neck deep into the business. While some states have a law about this being mandatory, it’s often missed in the agreement. All fees should be summarised along with miscellaneous expenses. This is also where the royalty fees should be mentioned.

Assessing Your Value

All relationships are a bit of give and take. If you expect a franchisor to negotiate on your terms, you must provide them with something in return. When negotiating, you must state what you bring to the table and how you can help their business grow. Highlighting your industry experience and business knowledge will help you get more leverage when negotiating fees and royalties for your franchise.

Requested Changes

While there are many areas you can modify or change in the agreement, you need to focus on your priorities. Reducing franchise fees and royalties should be your primary focus, with the addition of a few other minor changes. If you request too many things at once, the franchisor will likely decline. It would help if you learned how to play smart to get your way.

Performance-Based Fees

The key to strong negotiating skills is letting the franchisor know you’re confident about the business. When you propose a performance-based fee structure, you give the franchisor the impression that you understand the business and you’ll be able to achieve a higher sales target. In such a scenario, you can lower the upfront fees and tweak the royalties a little, so you don’t spend a lot upfront. This is a smart tactic that not only shows your commitment to the business but also your confidence about making it a successful one.

Considerations Of Fees And Royalty

One of the most overlooked discussions when considering fees and royalties based on the percentage of sales is net versus gross sales. Every business has certain overhead expenses, so paying royalties on gross sales is setting yourself up for failure. Always pay a percentage of the fees or royalties on net sales, not gross, as this is not your profit.

Termination

When you get into an agreement with a franchisor, it’s normal to hope for the best, but you must also prepare for the worst. If, for any reason, the franchise does not work out as planned, there needs to be a clear understanding of what the termination process would look like. It also needs to state certain grounds on which either party could ask to terminate the agreement.

Renewal Rights

All agreements have a tenure, after which both parties will decide to renew or terminate the agreement based on their relationship, understanding, and performance. While you may want to renew it perpetually, a franchisor will always want a little leeway, so try to aim for a long agreement to avoid having to renew over and over. Always remember renewing the agreement would mean having to go through the entire process once again, and that’s not easy.

Guarantor

The stronger you come across to a franchisor, the easier it will be to negotiate. While the area and skills play an essential role, it’s also important for someone to have your back in case the business goes belly-up. A guarantor can be any third party who takes responsibility for the actions of the franchise owner and also guarantees that they (the guarantor) will be responsible for any financial obligations in case the franchise owner cannot handle them.

Getting the Most from Franchise Fees and Royalties

Negotiating the deal for lower fees and royalties may seem like a lengthy and almost unachievable effort. The truth, however, is when you do your homework and go in with meticulous planning, confidence, and the zeal to succeed, nothing can stop you from striking a deal that will help your profits soar.

>> Read also : 10 things you must know about franchise agreements