Franchisees Negotiating Franchise Agreements, Part III: Development Agreements
Having reviewed general franchisee considerations in negotiating franchise agreements and then looking at specific clauses to consider, I turn in this section III to development agreements, which involve most of the issues discussed above, but that also raise issues specific to development.
III. DEVELOPMENT AGREEMENTS
The list below covers some key clauses in a development agreement, but the list is not exhaustive. And it makes only a point or two on each clause. Use it for brainstorming or as a checklist, but not as a substitute for review of your agreement by a competent franchisee lawyer.
Amount of up-front fees. The stronger the package you bring asa franchisee (financing, experience, expertise), the more leverage you have to decrease fees.
Price for additional units. The stronger the package you bring, the more leverage you have to ask for lower fees on additional units.
Size of territory. Many franchisors have set these, but you can ask for changes for good economic reasons.
Build-out schedules. Try for flexibility. Consider the option to buy extra time for build-out at a set price.
Cross-default provisions. The more franchise or other agreements you have with a franchisor, the greter the risk you face in cross-default provisions. For example, economic considerations may force you to close one unit, which would be a breach. You don’t want to put your whole system at risk.
Personal guarantees. You have generally paid up-front, non-returnable fees for your units. You should argue that the franchisor does not need a personal guarantee on top of that.
Liquidated damages. You should try to limit your damages for missing your build-out obligation to forfeit of the up-front fee.
Training. As you get more sophisticated in the system, you should not be required to send the same number of people for training at headquarters or some specified unit. You also want flexibility to train your own people.
This is the final part of a four part series. Read the entire series: Part 1 | Part 2 | Part 3 | Part 4
Peter Silverman heads the franchise dispute resolution group at Shumaker, Loop & Kendrick. He can be reached at psilverman@slk-law.com
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