USA Trends and Developments Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison D. Marzocco, Rosen Karol Salis, PLLC
Rosen Karol Salis, PLLC Rosen Karol Salis, PLLC 110 East 59th Street 23rd Floor New York, NY 10022 United States Tel: +1 212 644 6644 Email: rlr@rosenlawpllc.com Web: www.richardrosenlaw.com
Territory and buffer zones In addition to ensuring that each franchise location includes a “protected territory”, it is also important to negotiate a defined “buffer zone” surrounding each franchise territory. Seek to provide for a “right of first refusal” or “right of first purchase” if the franchisee is seeking, directly or by another franchisee, to open within the buffer zone. This will protect the business against competition from other franchisees and the franchisor, if either seeks to open a location out - side but close to the protected territory which, in the absence of a buffer zone, would still compete in your market – which is, of course, within your protected territory. Fees and caps While franchisors are usually hesitant to negotiate roy - alty and other fee rates, it is important for franchisees to seek to limit potential increases over the life of the franchise relationship, and it is reasonable to seek a “cap” or limit on the franchisor’s ability to raise its fees unreasonably. Term length and renewal rights “Evergreen”, or perpetual, franchise terms are ideal, but not necessarily typical. Generally, longer initial terms and the right to multiple renewal options pro - vide the franchisee with the ability and time to build substantial equity in the franchised business. Fran - chisees should also look to negotiate certain provi - sions in the franchise agreement to incorporate key negotiated provisions, such as royalty and market - ing fund rates, renewal and transfer provisions, and the territory renewal agreements (if possible), rather
What Every Prospective Franchisee and Franchisor Should Know
Investing in a franchise business is a major financial and personal commitment for the franchisee. Unlike starting a business from scratch, franchise ownership means stepping into someone else’s brand, system and rules, which are governed by the franchise agree - ment. Likewise, the franchisor must take seriously the fact that it is entering into a long-term business rela - tionship, often measured in decades, with a third party that will engage in business under the auspices of the franchisor’s brand; thus, obviously, choosing the “right” franchise is crucial for any prospective fran - chisee. This article is a survey of various key aspects of the franchisee–franchisor relationship from both sides, as well as related real estate issues that will impact many, if not most, franchise businesses. Negotiating the Franchise Agreement Prospective franchisees too often treat the franchise agreement as a “take it or leave it” document. While franchisors are, understandably, less willing to negoti - ate certain core provisions such as royalty and mar - keting fund fee rates, there are other key provisions which reasonable franchisors should be willing to negotiate. Franchisees should be wary of franchisors who regard their franchise agreements as non-nego - tiable – unfortunately, things sometimes go wrong dur - ing the franchise relationship, and both parties will be in a better position to resolve their issues if they begin their relationship as “team players” rather than adversaries. The following is a non-exhaustive list of issues that should be addressed when negotiating a franchise agreement.
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